Download - Factory Mutual 2012 Annual Report

1P13000 Printed in USA 2013 FM Global All rights reserved. www.fmglobal.com

In the United Kingdom: FM Insurance Company Limited 1 Windsor Dials, Windsor, Berkshire, SL4 1RS Regulated by the Financial Services Authority.

Annual Report 2012

certainty

FM

Glo

bal A

nn

ual R

ep

ort 2

01

2

FM Global Annual Report 2012 3

Report Contents

Executive Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 5

About Our Featured Clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 10

SKF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 12

Celestica . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 14

The Cooper Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 16

FedEx . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 18

FM Global Around the World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 20

FM Global Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 21

Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 25

Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 57

Industry Ratings

Rating Agency Financial Strength Rating Outlook

A.M. Best A+ (Superior) Stable

Fitch AA (Very Strong) Stable

For additional ratings information, view Industry Ratings at www.fmglobal.com.

FM Global is a leading commercial property insurance company that forms long-term

partnerships with its clients to support risk management objectives through a unique

combination of engineering, underwriting and claims services. We work to ensure our

clients business continuity by safeguarding their properties with seamless, worldwide

coverage and property loss prevention engineering solutions.


By all key measures, 2012 was a very successful year. Financially, we achieved all our objectives, both in our insurance operations and in the performance of our investments. Client retention remained very high, and 2012 was one of our best years yet for attract-ing new business. We accomplished all of this despite the impact of Superstorm Sandyour single largest net aggregate natural disaster loss to date.

In simple terms, our in-force premium grew by 8.6 percent, our combined ratio was below 86 percent and our surplus grew 14.9 percent to US$7.9 billion. These outstanding results reinforce the strength of our mutual business model, our balance sheet and our unique focus on working with our clients to ensure the resiliency of their businesses.

Review of 2012We continued to enhance our products and services to better serve our clients evolv-ing property risk management needs. At the same time, we focused on being more effective with our time and resources.

We achieved significant risk improve-ment, a key to our long-term success. In cooperation with our policyholders, we exceeded our plans to implement human element and overall physical improve-ments. Most importantly, our policyhold-ers will have installed sprinklers in an additional 46 million square feet (4.3 mil-lion square meters) of existing facilities.

Our response to Superstorm Sandy re-inforced the strength of our natural catastrophe readiness. In this single event, we responded to approximately 2,200 claims. Our claims and engineering teams acted quickly and efficiently to get our clients back into operation despite the extreme challenges associated with weather, lack of electrical power, trans-portation disruption and fuel shortage.

We continued to perform well in the timely delivery of our insurance prod-uct. Despite the complexity of property insurance policies, 71 percent of our poli-cies were delivered before the effective date of the contract, and 95 percent within 40 days.

A major achievement was the develop-ment of Affiliated FM Online, which will be introduced to our middle-market clients in 2013. This new extranet technology platform will strengthen our relationship with broker partners and clients, and it will serve as the foundation for the next genera-tion of FM Globals extranet, MyRisk.

In another key initiative, we expanded the scope and use of the SimZone, our state-of-the-art training facility in Norwood, Mass., USA. In this unique setting, our en-gineers gain hands-on experience in a vari-ety of learning areas that simulate property hazards and real-world scenarios. In 2013, we plan to open the SimZone to our clients so that they also may take advantage of this powerful learn-by-doing method.

Lastly, we have taken our knowledge, data and research expertise and combined it with current technologies, models and analytics. The results have led to major strides in risk assessment, risk improve-ment and client services. We believe this combination has tremendous potential for process improvement in the future.

Executive Message

Overall, our consolidated in-force premium grew by 8.6 percent

to US$5.5 billion, the most growth weve attained since 2006.

6 FM Global Annual Report 2012

We also continued to receive third-party recognition of our products and services. The readers of Business Insurance maga-zine named FM Global the top commer-cial property insurer for service, expertise and overall performance. For the second consecutive year, Greenwich Associates ranked us number one for underwriting expertise, customer service and claims processing responsiveness. And, Global Finance magazine named us the worlds best supply chain risk insurance provider.

2012 Premium TrendsFrom an industry perspective, after a string of extreme worldwide natural disasters, coupled with subpar investment returns in 2011, the insurance market-place fully expected pricing, terms and conditions of the commercial insurance marketplace to improve in 2012. How- ever, the lack of significant insured natural disasters and improved equity markets in the first half of the year damp-ened those expectations. Superstorm Sandy, which seemed to surprise the markets with the scope and breadth of

its impact, caused the marketplace to re-vert to the environment that existed at the beginning of the year.

Our consolidated gross in-force premium (excluding new business and net of lost business) grew by 2.1 percent, a favor-able result reflecting the strength of our client relationships. Given the relatively challenging economic conditions in Europe, premium growth from existing clients was greater in North America. The strength of our product offerings was reflected in our success with new business acquisitions. Premium in force from new client relationships grew by 6.5 percent, making this a standout year for new business. These results, too, were more successful in North America than in Europe. Overall, our consolidated in-force premium grew by 8.6 percent to US$5.5 billion, the most growth weve attained since 2006.

Affiliated FM, positioned in the com-mercial property middle market, grew 9.7 percent to US$976 million. Correspond-

ingly, our large commercial property business grew at a slightly slower rate, climbing 8.2 percent to US$4.3 billion. Combined, our middle market and large property lines represent 97 percent of our overall consolidated premium, with Mutual Boiler Re and FM Global Cargo representing the balance.

Consolidated net premium earned grew to US$3.6 billion, or 5.2 percent, when compared with 2011 results that exclude the effect of the 2011 membership credit.

Loss TrendsOur loss ratio for 2012 was 60.6 percent, significantly lower than our 95.9 percent loss ratio in 2011, but higher than in 2010 and 2009.

The loss ratio from natural disasters and aggregations was 29.3 percent versus 52.3 percent in 2011, when we incurred one of the highest totals for both frequency and severity of insured losses from natu-ral disasters in our history. Nevertheless, Superstorm Sandy, accounting for 12.3


loss ratio points, has become our single largest aggregate net lossgreater than Hurricane Katrina in 2005 and the World Trade Center disaster on Sept. 11, 2001. More significantly, three of our largest net aggregate natural disasters occurred in 2011 and 2012. Superstorm Sandy was predominantly a flood event for our clients affected by the powerful storm, and it oc-curred in known flood-prone areas. Based on a review of our losses, our flood assess-ment, mitigation and risk-transfer process-es remain the same.

Our risk loss ratio compared very favor-ably with last year at 27.7 percent versus 39.6 percent. Risk losses are predomi-nantly from fire and explosion. The fre-quency of large losses stayed the same, but the average size of the loss was less severe. The majority of risk losses con-tinue to occur at unsprinklered locations and disproportionately outside of North America. Working cooperatively with our clients to achieve risk improvement re-mains a top priority. This is matched by our long-term goal of greater regulatory

recognition of the benefits of property conservation and the role of fire sprin-klers in building codes and standards.

Expense TrendsAs a provider of knowledge-based ser-vices in a commodity marketplace, we make it a priority to deliver high-quality services while carefully managing our expense ratio. Our expense ratio of 25.1 percent remained flat from 2011 and was slightly higher when 2011 is adjusted for the membership credit issued that year.

2012 was the first full year of our for-mal companywide process improvement effort, led by a dedicated business pro-cess improvement team. The team was successful in establishing a systematic approach to evaluating and improving important processes in the company. One of the keys to this success was the active involvement of all the key stakeholders of the process under review. We are very optimistic that this will result in tangible, permanent productivity gains while im-proving our effectiveness.

Employee TrendsIn 2012, we conducted an all-employee survey with a response rate of 88 percent, up from 82 percent in 2007, and an ex-cellent participation rate by any measure. Most gratifying was the level of confi-dence and optimism our employees have about the future of FM Global, our busi-ness environment and our approach with our customers. As with the 2007 survey, we will develop action plans to address the issues raised in the survey.

Our strong employee survey participation rate reflected our low, stable turnover rate of 6 percent, coupled with average em-ployee tenure of 14 years. The key to our success is a combination of a stable group of motivated employees and the avail-ability of specific training programs. In 2012, employees completed 9,000 days of classroom training at an average cost of US$1,500 per employee. In addition, employees completed more than 38,000 hours of online training.


Shivan S. Subramaniam Chairman and Chief Executive Officer

Investments and SurplusOur investment portfolio performed very well. Both our equity and fixed income portfolios exceeded their respective benchmarks. The total portfolio returned 10.11 percent versus the benchmark of 9.45 percent. Asset allocation was stable, with an emphasis on liquidity. These investment results, coupled with our underwriting results, helped to increase the surplus by 14.9 percent to US$7.9 billion. Both A.M. Best and Fitch reaffirmed our ratings at A+ and AA, respectively.

GovernanceAs a mutual company owned by our policyholders, we value the governance by our directors, eight advisory boards and five risk management executive

councils. We are thankful for their loyal support. Graham Spanier, retired presi-dent of the Pennsylvania State University, resigned from our board in July 2012. We thank him for his contributions.

Looking AheadThe majority of our mutual policyhold-ers are growing largely in locations outside their home countries and espe-cially in the Asia/Pacific region. Since 2008, insured locations measured by their insured values grew 30 percent in that region versus less than 3 percent in the rest of the world. To better support this growth rate and the needs of our policyholders, we have created an Asia/Pacific division based in Singapore, similar to our operating structure in Europe and North America. We will be

building on our capabilities and expertise in that region.

Our focus continues to be on develop-ing and delivering efficient and effective risk improvement solutions to our policyholders across the world, while providing stable risk-transfer solutions that are compliant with local regulatory requirements.

The dedication of our employees and their commitment to our policyhold-ers across the world are integral to our success. We are deeply grateful for their efforts. In 2013, we will be celebrating 50 years of providing global capabilities to our clients, and we look forward to continuing this tradition for many years to come.

Financially, we achieved all our objectives, both in our

insurance operations and in the performance of our investments.

Corporate executives are taking a more active role in property risk manage-

ment. Changes in the global business landscape, the sharp increase in natural

catastrophes and the magnitude of supply chain risk have captured the atten-

tion of governing boards and the investment community. Physical risk is now

embedded in a complex manufacturing and distribution web, where every

strand is likely to lead to another interdependency and greater vulnerability.

When a property loss event occurs, the result may be costly to a companys

reputation, to its competitive advantage and to shareholder and customer

confidence. In the following pages, senior leaders from four multinational

corporations discuss this changing dynamic at their organizations. We thank

them and their companies for their participation.


Featured Clients

As one of the world leaders in bearing technology for more than a century, SKF has developed a unique understanding of rotat-ing equipment and how machine components and industrial processes are interrelated. Today, SKF provides a wide range of technologies and products to original equipment manufactur-ers and aftermarket customers around the world, in more than 40 industries. With its knowledge in bearings and units, seals, mechatronics and lubrication systems, SKF helps its customers improve productivity and energy efficiency, optimize designs and reduce maintenance costs and time to market. Headquar-tered in Gothenburg, Sweden, SKF has more than 46,000 em-ployees and operates 140 sites in 32 countries. Its 16 technical centers around the world, as well as established collaborations with major universities and research institutes, allow SKF to continuously develop new technologies that offer competitive advantages to its customers. The company reported net sales revenues of US$9.9 billion in 2012.

Celestica is dedicated to building end-to-end product lifecycle solutions that drive its customers success. Its expertise in design and engineering, electronics manufacturing and supply chain management services allows Celestica to develop customized solutions that drive product innovation, cost savings, supply chain efficiencies and improved time to market. With more than 30,000 employees in 14 countries throughout North America, Asia and Europe, Celestica offers its customers a global network that gives them the flexibility they need to respond quickly to changes in end-market demand. Celesticas customers include more than 100 original equipment manufacturers and some of the biggest names in communications, consumer products, aerospace and defense, industrial, alternative energy and health care. Headquartered in Toronto, Canada, Celesticas 2012 rev-enue was US$6.5 billion.


The Cooper Companies is a global medical device company. Its CooperVision business unit is one of the worlds leading manufacturers of soft contact lenses with a strong heritage of solving the toughest vision challenges. CooperVision produces a full array of contact lenses, all featuring advanced technology, materials and cutting-edge science. Its CooperSurgical business unit is dedicated to improving the delivery of health care to women, offering over 600 prod-ucts for use in hospitals, womens health clinics, OB/GYN offices and fertility clinics. Growing and expanding since its inception in 1990, CooperSurgical has completed over 30 acquisitions. Headquartered in Pleasanton, Calif., USA, The Cooper Companies has approximately 7,800 employees, gener-ated over US$1.4 billion in revenue in fiscal year 2012 and sells products in over 100 countries.

FedEx pioneered the express delivery industry in 1971 and now delivers an average of 9 million shipments a day through its express, ground and freight operations. Headquartered in Memphis, Tenn., USA, FedEx operates in more than 220 countries and territories and serves every address in the United States. It has more than 300,000 team members, 90,000 motor vehicles and 660 aircraft serving 375 airports worldwide. FedEx is more than just an express delivery company, pro-viding its customers and businesses with a broad portfolio of transportation, e-commerce and business services. Its website receives 32 million unique visitors a month and 6.5 million package tracking requests a day. It is consistently ranked among the worlds most admired and trusted employers, and its annual revenue reached US$43 billion in 2012.


SKF

The cost of risk

improvement is marginal

when compared with the

cost of an expected loss.

Per Thorn, Group Treasurer


One way we protect our business continuity at SKF is through oversight provided by our internal loss prevention board, whose members include senior managers from all our business areas. Thanks to the efforts of this group, we have made significant gains in risk improvement.

Globally, our biggest challenge was to build a common understanding of what is an acceptable level of riskbecause the interpretation of risk severity can vary from one location to the next. We have ad-dressed this by working with FM Global to establish a companywide policy that defines our risk tolerance level.

Education is a main driver of the policy. For instance, we are educating employ-ees on what I call the zero-costor hu-man elementissues that require very little capital investment and strengthen our risk management competency. Fur-thermore, our risk management team has codified our loss prevention standards. To ensure these standards are adopted universally, we have dedicated an inter-nal engineering consultant to oversee risk quality of new construction, includ-ing all greenfield sites, whether we are building in Shanghai, India or Korea. For example, our policy clearly states that every greenfield site is to be sprinklered.

What we know, through such vehicles as FM Globals business impact analysis, is that the cost of risk improvement is marginal when compared with the cost of an expected loss, particularly when assessing supply chain vulnerability. By putting it in such transparent terms, we create a true awareness of risk.

At SKF, we hold our strategic suppliers to the same standards we apply to our-selves. FM Global is helping us by con-ducting engineering visits at key supplier locations. We dont hesitate to insist our major suppliers improve their risk qual-ity if necessary. It is a pragmatic business decision for us, and for them.

By the same measure, our customers are interested in what we are doing to prevent loss. Our larger customers visit our plants to verify we are meeting their criteria. They cannot afford to have an interrup-tion in their stream of goods. Their busi-ness continuity depends on our reliability. The standards we have in place help to ensure our reliability is never in doubt.

certainty

about the quality of risk worldwide


Celestica

As a provider of innovative supply chain solutions, we recognize that our customers expect more today. They want us to help them anticipate problems and proactively propose cre- ative solutions to solve them. They want us to share our expertise to help them increase their flexibility and ensure on-time delivery. Our strategy to drive speed, flexibility and responsiveness through our supply chain is critical to our business and enables us to meet our customer commitments in the event of a disruption.

To minimize the risk of supply chain dis-ruption, we diligently assess risks and take action. Our policies and procedures reflect best practices on how to protect our global sites, monitor our business partners and respond to emergencies.

There is value in highly protected risk (HPR) sites. Maintaining HPR status is a competitive differentiator and demon- strates our commitment to flawless execution.

There are two ways to manage risk: you can adopt good risk management prin-ciples and you can transfer risk through insurance. We focus on the former to minimize the size and cost of the latter. The program we have with FM Global contributes to the success of our strategy. Not only does FM Global help us with risk assessments and improvements at our current facilities, but they also assist us with site selection and in the construc-tion of new facilities.

The FM Global platform helps Celestica identify what and where the risks are, how they can be improved and how we can educate the people in our network on managing risk. By following this course, we have already avoided poten-tially steep flood losses at a key location, while reassuring our customers that due diligence has been done on all new sites, and that we will meet their expectations for on-time delivery.

certainty

about supply chain continuity

To minimize the risk of supply chain

disruption, we diligently assess

risks and take action.

Jeff McConaghy, Vice President, Corporate Treasurer

The Cooper Companies

Risk mitigation is built into

our planning process. We

need world-class facilities to

achieve our long-term goals.

Carol Kaufman, Executive Vice President, Secretary and Chief Administrative Officer


certainty

We cannot afford to have a long-term disruptionits not an option for a global company operating in a very competitive market-place. Thats why weve put together comprehensive business continuity plans for our major sites and business units. We realize that lost production equates to lost sales, and I am not aware of any company that can afford lost sales.

At Cooper, risk mitigation is built into our planning process. We need world-class facilities to remain competitive and meet our long-term goals. It wasnt always viewed this way. For many years, deci-sions about insurance and risk manage-ment were made entirely at the corporate level, with no input from the operations. That all changed with a merger that nearly doubled the size of our company in 2005. We forged our relationship with FM Global that same year.

And in certain respects, FM Global was a game changer for us because they provide insight and guidance to ensure we are protecting our assets to the best of our ability.

The transition is now complete. The concept of loss prevention is now part of our DNA. Operations management are thinking about risk mitigation when theyre doing their planning. During the last two years, we also created an inter-nal risk committee that has helped our various business units understand the importance of a robust business continu-ity plan and how it can be the most vital document you turn to when placed in the path of a hurricane or in the aftermath of an earthquake. Our board of directors and executives are equally committed to pro-tecting our assets, and their support has been tremendous.

about asset protection

There is a pervasive spirit of partner-ship within our organization and with FM Global. Among the advantages of working with FM Global are its stabil-ity as a mutual company and the vast array of resources it brings to loss pro-tection. We ask FM Global to put on our business hat and view the risk from our vantage point. They have gone to great lengths to get to know our people and our business. Its led to strong communica-tion and the understanding that we are in this together.


FedEx

Longevity and reliability are the cor-nerstones of our relationship with FM Global. Our working relation-ship began in 1981, when FedEx was much smaller than the US$43 billion multinational enterprise it is today. As FedEx has grown and become more com-plex, FM Globals ability to support and grow along with us has been invaluable.

A main attribute we provide to our cus-tomers is access to the global economy. We participate in supply chain and in logistics fulfillment all around the world. Continuity and reliability are fundamen-tal to the promise we make to customers.

Consistently delivering on that promise is fundamental to our mission, and has made FedEx one of the most admired compa-nies in the world. For us, its a question of how to plan in advance to mitigate the im-pact of disruptionswhich, in our busi-ness, are inevitableand how to react and adapt effectively during the events.

At the macro level, were always design-ing resiliency into our global networks. FM Globals role is to help us make sure we are less vulnerable in terms of the impact an event may have on our facili-ties, particularly the major hub and sort facilities around the world. Thats where you can see the real tangible results of our relationship.

A visible example is our Asia/Pacific hub in Guangzhou, China, one of our larg-est hubs outside the United States. That facility, which opened in 2009, is the cen-ter point of our operations in the region. It is also a model facility for property protection. Working collaboratively on design aspects and construction planning with FM Global, we were able to take an approach in China that mirrored our approach in the United States. The result was the development of a highly pro-tected risk facility that will help us to protect our people, our assets and our brand. That is the brand promise we make, and FM Global helps us to keep it.

certainty

about enterprise resilience

Continuity and reliability are

fundamental to the promise

we make to customers. Mike Lenz, Corporate Vice President and Treasurer


FM Global products and services are available around the world. The countries listed below represent those where we regularly serve our clients:

BahamasCanadaCosta RicaDominican RepublicEl SalvadorGuatemalaHondurasJamaicaMexicoNicaraguaPanamaTrinidad and TobagoUnited States

ArgentinaBoliviaBrazilChileColombiaEcuadorParaguayPeruUruguayVenezuela

Albania Algeria AngolaArmeniaAustriaAzerbaijanBahrainBelgiumBosnia and HerzegovinaBotswanaBulgariaBurkina FasoCameroonCroatiaCyprusCzech RepublicDenmarkEgyptEstoniaFinlandFranceGabonGeorgiaGermany

GhanaGreeceHungaryIcelandIreland IsraelItalyJordanKazakhstanKenyaKuwaitKyrgyzstanLatviaLebanonLiechtensteinLithuaniaLuxembourgMacedoniaMadagascarMaltaMontenegroMoroccoMozambiqueNambia Netherlands

NorwayOmanPolandPortugalQatarRomaniaRussiaSaudi ArabiaSenegal SerbiaSlovakiaSloveniaSouth AfricaSpainSwedenSwitzerlandTanzania TunisiaTurkeyUkraineUnited Arab EmiratesUnited Kingdom

Australia BangladeshBruneiCambodiaChinaHong KongIndiaIndonesiaJapanLaosMacauMalaysiaNew ZealandPakistanPhilippinesSingapore South KoreaSri LankaTaiwanThailandVietnam

North America South America Europe, Middle East and Africa Asia/Pacific

FM Global Around the World


FM Global Group

In addition to the large-risk property business, the FM Global Group includes a number of other key business operations. Several of those are described in this section.

Affiliated FM is focused on commer-cial middle-market property clients. The companys value proposition is to pro-vide innovative products and services designed to protect clients assets, help improve their operating reliability, reduce their overall cost of risk and maintain their profit and market share. The com-pany markets its products and services worldwide through a select network of agents and brokers, providing underwrit-ing expertise and property loss control engineering tailored to meet specific cli-ent needs.

Affiliated FM is committed to developing strong relationships with its brokers and clients through:n Superior commercial property underwriting knowledge, expertise and productsn Customized property loss prevention engineering programsn Responsive and efficient services in a highly automated environmentn Prompt, professional, flexible and fair claims service

The Affiliated FM product line includes the all-risk proVision policy, as well as market-specific policies for commercial real estate accounts, condominium asso-ciations, educational institutions, health care facilities, manufacturing risks and retail operations. The company also of-fers a number of unique endorsements to provide market-leading coverage for our brokers and clients. Some examples:n BI Selectscenario-based flexible business interruption coverage that helps clients maximize business interruption recoveryn Green Coverage Endorsement added coverage for clients wishing to enact or maintain sustainable, environmentally friendly business and building practicesn Risk Improvement Endorsementcoverage after a loss for physical improvements to a clients location in accordance with FM Globals Property Loss Preven- tion Data Sheets

Recognizing that middle-market clients are increasingly expanding operations, Affiliated FM continues to focus on pro-viding a market-leading international product offering through the proVision 360 global master policy program. This of-fering provides seamless coverage for the international exposures of clients by using the master policy concept in con-junction with legally admitted underly-ing coverage from either the companys international licenses or by utilizing the FM Global WorldReach partner network.

Affiliated FM provides international ex-pertise with a local presence. The orga-nization has office locations in Australia, Canada, France, Germany, the Nether-lands, the United Kingdom and throughout the United States, and it offers coverage in 60 countries. Leveraging streamlined processing systems and a global network, Affiliated FM provides consistent world-wide delivery of coverage, underwriting and engineering products and services, and claims management.


FM Global Group

Mutual Boiler Re has provided boiler and machinery insurance in North America for 135 years, specializing in mechani-cal, electrical and pressure systems breakdown treaty reinsurance and sup-port services to the commercial property insurance marketplace. Today, it works with more than 200 insurance companies, providing broader and more competitive coverage to policyholders. To meet the growing demand for sustainable solu-tions, Mutual Boiler Re introduced the industrys first green equipment break-down endorsement.

Mutual Boiler Re fosters long-term treaty relationships that help partner companies develop new business opportunities and retain their clients, from Main Street business and commercial property own-ers to farm owners and homeowners. The company provides tailor-made coverage, rate development, filing, underwriting and claims support, and customized manage-ment reports. Integral to the treaty agree-ment is the provision of boiler and pres-sure vessel jurisdictional certification, which is carried out by commissioned inspectors from FM Global. Through the creation of customized training programs, Mutual Boiler Re helps broaden its partner companies knowledge of risk exposures. By fostering a value proposition that promotes customer advocacy, flexibility and competitiveness, Mutual Boiler Re has a leadership position in the specialty market it serves.

FM Approvals is a leader in third-party certification of property loss prevention products and services. Industrial and commercial companies around the world know that products bearing the FM APPROVED certification mark, backed by more than 100 years of scien-tific research and leading-edge product testing, conform to high standards. The companys globally recognized expertise spans more than 500 categories of prod-ucts and services, including roofing and building material, cleanroom material, and electrical and fire protection equipment. FM Approvals offers complimentary on-line resources dedicated to property loss prevention.


SM

FM Global Cargo provides innovative, comprehensive and flexible cargo insurance coverage, automated certifi-cate management, and risk engineering services tailored to the international trade and transportation needs of global businesses. The all-risk cargo policy pro-tects the full value of cargo throughout a clients product distribution network. Focused risk engineering services help clients understand the hazards that threat-en their supply chain or major project shipments and determine cost-effective loss prevention solutions.

Corporate Insurance Services (CIS) is FM Globals wholly owned brokerage operation, maintaining relationships with a variety of U.S. domestic insurers, Lloyds of London, excess and surplus lines insurers, and specialty compa-nies. CIS provides access to markets for perils, coverage and/or capacity not readily available through FM Global or Affiliated FM. (CIS coverage is tailored to meet FM Global policyholders insurance requirements.) CIS policy options include all-risk, earthquake, flood, wind, MFL capacity, inland ma-rine, ocean marine and other lines.

TSB Loss Control Consultants, LLC, is an emergency services training organi-zation providing comprehensive training for emergency response personnel and those responsible for organizing, manag-ing and/or directing emergency response activities. The company, founded in 1971 and based in Rome, Ga., USA, provides specialized training at its own 328-acre (132-hectare) loss control training center and on-site to personnel from industrial fire brigades, hazardous materials emergency response teams, technical rescue teams, emergency medical services, municipal fire services and other pro-fessionals responsible for emergency response in industry and municipalities.

Investment Report .........................................................................................page 26

Managements Statement on Internal Control Over Financial Reporting ...............................................................................page 28

Report of Independent Auditors ....................................................................page 29

Consolidated Balance Sheets ........................................................................page 30

Consolidated Statements of Operations ........................................................page 31

Consolidated Statements of Comprehensive Income/(Loss) .........................page 32

Consolidated Statements of Changes in Policyholders Surplus ...................page 32

Consolidated Statements of Cash Flows .......................................................page 33

Notes to Consolidated Financial Statements ................................................page 34

Financial Information


All financial figures in U.S. dollars.

Investment Report

Global stock and bond markets performed well in 2012, despite lackluster global economic expansion and political uncertainties. Two primary factors drove the markets move higher. First, aggressively accommodative monetary policy in the U.S. and Europe resulted in downward pressure on interest rates, benefiting financial asset valuation and economic expansion potential. Second, corporate profits and cash flow have remained a positive factor, enabled by productivity gains and effective management of costs. The primary challenge remains the fiscal imbalances in the U.S. and Europe, with government debt levels generally viewed as unsustainably high, and the need for tax increases/spending cuts a potential depressant to economic activity.

FM Globals investment positions and returns by asset class are shown on page 27. Return on total assets was 10.11 percent compared to the benchmark return of 9.45 percent. Relative outperformance was achieved in both the stock and bond categories. There was some offset from a relatively high cash balance, held partly as a conservative funding source for operating cash outflows due to the high natural catastrophe losses experienced in 2011.

Return on FM Globals equity portfolio was 17.05 percent, compared to a 16.00 percent return in the S&P 500 and a 16.10 percent return on the equity benchmark (a blend of 89 percent S&P 500 and 11 percent MSCI world ex. U.S.). The outperformance was the result of moderate overweights in some of the less defensive sectors of the market (a positioning which detracted from returns in the risk-averse market of 2011). Specifically, results benefited from overweighted positions in technology and in the banking sector, along with an underweighted position in defen-sive electric utilities. The primary negative sector exposure was a moderate overweight to the energy sector, which underperformed due to lower energy commodity prices, which in turn reflected supply factors including improved natural gas production technologies.

Turning to the debt securities portfolio, FM Globals internally managed high-grade debt portfolio returned 5.50 percent versus the Barclays index benchmark return of 4.40 percent. Outperformance was driven by an over-weight to non-U.S. government debt sectors, which benefited from tighter interest rate spreads. Similar to sentiment change in the equity market, investor sentiment in fixed income also became somewhat more opportu-nistic in 2012, compared to the very risk-averse attitude which characterized 2011. This shift is also apparent in the 16.48 percent return of the externally managed high-yield debt portfolio. As is generally the case, FM Globals fixed income duration was a neutral factor (with the internal portfolio duration at 4.1 years, very close to the benchmark 4.2 years), reflecting the ongoing strategy of value added through bottom-up security and sector positioning.

In addition to providing functional support to FM Globals business operations, the real estate group manages 4.6 million ft. (430,000 m) of investment properties. These real property assets provide an additional element of portfolio diversification. They also provide a cost-effective approach in meeting FM Globals ongoing real estate needs, while enhancing the value of its properties. For 2012, commercial properties produced $86.7 million in revenue and $25.1 million in cash flow.


All financial figures in U.S. dollars.

Rates of Return 2012 Portfolio Benchmark

Total portfolio 10.11% 9.45%1

Debt securities

Investment-grade taxable bonds 5.50% 4.40%2

Municipal bonds* 6.04% 5.65%3

High-yield bonds 16.48% 15.55%4

Equity securities total 17.05% 16.10%5

Internal portfolio 16.76% 16.00%6

External portfolios** U.S. portfolios 15.72% N/A International portfolios 20.23% 16.83%7

1 Weighted S&P 500 Plus Global Stock Index, Barclays Index, T Bill 2 Custom Barclays Index 3 Barclays Muni 2-12 Year 4 Merrill Lynch U.S. High-Yield Master II Constrained Index 5 S&P 500 Index (89%) plus MSCI All World ex. U.S. (11%) 6 S&P 500 7 MSCI All World ex. U.S.

* Taxable equivalent return. ** Primarily smaller sized companies.

Pretax Contribution to Surplus (in millions) 2012 2011

Investment income $ 297.5 $ 292.3Realized gains/(losses) 334.4 297.1Unrealized gains/(losses) 389.2 (258.9) $ 1,021.1 $ 330.5

As of December 31 2012 2011Holdings (in millions) Total Percentage Total Percentage

Equity securities $ 4,950 42.4% $ 4,417 42.0%Taxable debt securities 3,585 30.7 3,259 31.0Municipal debt securities 1,573 13.5 1,504 14.3Short-term funds 953 8.2 796 7.6Partnerships and alternative investments 612 5.2 537 5.1Total $ 11,673 100.0% $ 10,513 100.0%

Investment Report


Managements Statement on Internal Control Over Financial Reporting

The management of FM Global is responsible for establishing and maintaining adequate internal control over financial reporting and for the preparation and integrity of the accompanying financial statements and other related information in this report. The consolidated financial statements of the Company and its subsidiaries, in-cluding the footnotes, were prepared in accordance with accounting principles generally accepted in the United States of America and include judgments and estimates, which, in the opinion of management, are applied on an appropriately conservative basis. The Company maintains a system of internal and disclosure controls intend-ed to provide reasonable assurance that assets are safeguarded from loss or material misuse, that transactions are authorized and recorded properly, and that the accounting records may be relied upon for the preparation of the financial statements. This system is tested and evaluated regularly for adherence and effectiveness by the Companys staff of internal auditors.

The audit committee of the Board of Directors, which comprises directors who are not employees of the Company, meets regularly with management and the internal auditors to review the Companys financial policies and procedures, its internal control structure, the objectivity of its financial reporting, and the independence of the Companys independent public accounting firm. The internal auditors have free and direct access to the audit committee, and they meet periodically, without management present, to discuss appropriate matters.

Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation.

These consolidated financial statements are subject to an evaluation of internal control over financial reporting conducted under the supervision and with the participation of management, including the chief executive officer and chief financial officer. Based on that evaluation, conducted under the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, management concluded that its internal control over financial reporting was effective as of December 31, 2012.

Shivan S. Subramaniam

Chairman and Chief Executive Officer

Jeffrey A. Burchill

Senior Vice President Finance Chief Financial Officer


Report of Independent Auditors

The Board of Directors and Policyholders ofFactory Mutual Insurance Company and Subsidiaries

We have audited the accompanying consolidated financial statements of Factory Mutual Insurance Company and Subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income/(loss), changes in policyholders surplus, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Managements Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditors ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial state-ments in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Factory Mutual Insurance Company and Subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

Boston, MassachusettsFebruary 15, 2013


See accompanying notes.

Consolidated Balance Sheets (in thousands)

December 31 2012 2011

Assets Investments:

Debt securities (including $300,300 and $261,100 of securities on loan under a securities lending program) $ 5,375,300 $ 5,104,500

Equity securities 4,989,900 4,416,900 Other securities 611,000 533,500 Real estate 453,000 376,200 Total Investments 11,429,200 10,431,100

Cash and cash equivalents 831,700 611,200Recoverable from reinsurers 2,126,600 2,011,400Premium receivable 638,800 678,800Prepaid reinsurance premium 315,400 325,900Premises and equipment 323,700 344,400Other assets 726,700 925,900

Total Assets $ 16,392,100 $ 15,328,700

Liabilities Unpaid losses and loss adjustment expenses $ 4,744,800 $ 5,176,500 Reserve for unearned premium 2,371,200 2,263,800 Current and deferred income taxes 488,800 267,200 Other liabilities 880,500 738,400Total Liabilities 8,485,300 8,445,900

Policyholders surplus Accumulated other comprehensive income 831,800 582,200 Retained earnings 7,075,000 6,300,600Total Policyholders surplus 7,906,800 6,882,800

Total Liabilities and Policyholders surplus $ 16,392,100 $ 15,328,700



Consolidated Statements of Operations (in thousands)

Year ended December 31 2012 2011

Gross premium earned $ 5,299,000 $ 4,945,000Ceded premium earned (1,677,600) (1,503,000)Net premium earned 3,621,400 3,442,000Membership credit (208,000)Net premium earned after membership credit 3,621,400 3,234,000 Investment-related income 387,300 364,900Fee-related income 53,000 48,400Total revenue 4,061,700 3,647,300 Net losses and loss adjustment expenses 2,193,900 3,099,100Insurance-related expenses 874,700 777,700Investment-related expenses 147,700 135,300Fee-related expenses 48,700 43,400Total losses, loss adjustment and other expenses 3,265,000 4,055,500 Net income/(loss) from operations 796,700 (408,200)Net realized investment gains 350,600 368,200Other than temporary impairment losses (16,200) (71,100) Net income/(loss) before income taxes 1,131,100 (111,100) Income tax expense/(benefit) 356,700 (69,600) Net income/(loss) $ 774,400 $ (41,500)



Consolidated Statements of Comprehensive Income/(Loss) (in thousands)

Consolidated Statements of Changes in Policyholders Surplus (in thousands)


Net income/(loss) $ 774,400 $ (41,500)

Other comprehensive income/(loss): Net unrealized appreciation/(depreciation) on investments in debt and equity securities, net of income tax expense of $134,100 for 2012 and net of income tax benefit of $87,200 for 2011. 255,100 (171,700)

Benefit plan assets and liabilities, net of income tax benefit of $11,800 for 2012 and $92,900 for 2011. (27,600) (172,500)

Foreign currency translation adjustment, net of income tax expense of $4,400 for 2012 and $1,600 for 2011. 22,100 (12,600)

Other comprehensive income/(loss) 249,600 (356,800)

Comprehensive income/(loss) $ 1,024,000 $ (398,300)


Retained earnings at beginning of year $ 6,300,600 $ 6,342,100 Net income/(loss) 774,400 (41,500)Retained earnings at end of year 7,075,000 6,300,600

Accumulated other comprehensive income at beginning of year 582,200 939,000Other comprehensive income/(loss) 249,600 (356,800)Accumulated other comprehensive income at end of year 831,800 582,200

Policyholders surplus at end of year $ 7,906,800 $ 6,882,800



Consolidated Statements of Cash Flows (in thousands)


Operating activities Net income/(loss) $ 774,400 $ (41,500)Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Decrease/(increase) in premium receivable 40,000 (108,500) Increase in reserves for unearned premium 107,400 219,100 Decrease/(increase) in unpaid losses and loss adjustment expenses (431,700) 1,483,100 Increase in recoverable from reinsurers (115,200) (801,700) Change in current and deferred income taxes 229,900 (146,200) Net realized investment gains (334,400) (297,100) Decrease/(increase) in prepaid reinsurance premium 10,500 (82,800) Other 183,900 (152,400)Net cash provided by operating activities 464,800 72,000 Investing activities Net sales of short-term investments 123,400 14,300Purchases of debt and equity securities (3,533,700) (2,928,500)Sales and maturities of debt and equity securities 3,212,700 3,202,200Capital expenditures (98,800) (71,600)Other 52,100 (34,300)Net cash provided/(used in) investing activities (244,300) 182,100 Increase in cash and cash equivalents 220,500 254,100Cash and cash equivalents at beginning of year 611,200 357,100 Cash and cash equivalents at end of year $ 831,700 $ 611,200


Notes to Consolidated Financial Statements (in thousands) December 31, 2012 and 2011

Note 1. Significant Accounting Policies

Basis of PresentationThe consolidated financial statements are stated in U.S. dollars and have been prepared on the basis of U.S. generally accepted accounting principles, which differ in some respects from statutory accounting practices prescribed or permitted by the State of Rhode Island and Providence Plantations, Department of Business Regula-tion, Insurance Division. On the basis of statutory accounting practices, consolidated policyholders surplus was $7,525,100 and $6,431,600 at December 31, 2012 and 2011, respectively; net income/(loss) for the respective years then ended was $712,300 and $(32,100).

The process of preparing financial statements in conformity with U.S. generally accepted accounting principles requires the use of managements estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

The Company provides comprehensive lines of property coverage and supporting services for industrial and institutional properties throughout the world.

Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions were eliminated in consolidation.

ReclassificationCertain amounts reported in the 2011 financial statements and disclosures have been reclassified to conform to the 2012 presentation.

Cash EquivalentsCash equivalents consist of various sweep accounts with a maturity of less than 90 days at acquisition.

InvestmentsManagement determines the appropriate classification of debt securities at the time of purchase. All equity and debt securities are classified as available-for-sale and are stated at fair value.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage and asset-backed securities, over the estimated life of the security adjusted for anticipated prepayments. This amortization and accretion is included in investment-related income. For mortgage and asset-backed fixed maturity securities, the Company recognizes income using a constant effective yield based on antici-pated prepayments over the economic life of the security. The mortgage and asset-backed portfolio is accounted for under the retrospective method and prepayment assumptions are based on market expectations. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments, and any resulting adjustment is included in investment-related income.

Other securities consist primarily of partnerships and alternative investments, which are accounted for under the equity method. As a result of the timing of the receipt of valuation data from the investment managers, these investments are reported on up to a three-month lag. Changes in the Companys equity in the net assets of these investments are included in income as net realized investment gains.



Note 1. Significant Accounting Policies (continued)

The cost of securities sold is based upon the specific identification method. Unrealized appreciation or depreciation of available-for-sale debt and equity securities, net of tax, is reported directly in policyholders surplus.

Impairments in equity securities deemed to be other than temporary are reported as a component of net income/(loss) before income taxes. Impairments in debt securities deemed to be other than temporary are segregated into credit risk and non-credit risk impairments. Credit risk impairments are reported as a component of net income/(loss) before income taxes. Non-credit risk impairments are recognized in other comprehensive income. Securities are reviewed for both quantitative and qualitative considerations in the calculation of impairments.

Under a securities lending program with an agent, the Company has temporarily loaned certain debt securities. Borrowers of these securities must deposit with the agent an amount of cash and/or securities equal to 102 percent of the loaned securities fair value for US currency-denominated securities or 105 percent of the loaned securities fair value for foreign-denominated securities. The portion of collateral received in securities is held in trust by the agent. The portion of collateral received in cash is invested by the agent in high-quality, short-term investments. The Company continues to receive the interest on the loaned debt securities as a beneficial owner, and the loaned debt securities are included in the investment portfolio of the Company. The cash collateral and the obligation to return that collateral are included in other assets and other liabilities, respectively, on the Consolidated Balance Sheets.

Income TaxesThe Company files consolidated U.S. and foreign income tax returns as required by law. The income tax expense/(benefit) is based upon pretax income reported in the consolidated financial statements. Deferred income taxes are provided, when appropriate, for the effects of temporary differences in reporting income and expenses for tax and financial reporting purposes. Deferred income taxes are also provided for unrealized appreciation or depreciation of investments, for pension and postretirement liabilities and for foreign currency translations.

The Internal Revenue Service (IRS) has reviewed the Companys federal tax returns for the 2005 through 2009 tax years and some issues remain unsettled. Additionally, the IRS is currently reviewing the Companys federal tax returns for the 2010 and 2011 tax years. Any adjustments that might result from the IRS examination of these income tax returns are not expected to have a material impact on the financial position, liquidity or results of operations of the Company.

Deferred CostsPremium taxes and commissions, the principal business acquisition costs, are deferred to the extent recoverable and are amortized over the period during which the related premium is earned. Deferred costs are included in other assets.

Certain pre-rental and other expenses incurred by the Companys real estate limited liability corporation subsidiaries are deferred and amortized over the lives of the various tenant leases.



Real Estate and Premises and EquipmentPremises and equipment are stated at cost, and depreciation is provided on a straight-line basis over the estimated useful lives of the respective assets. Upon retirement or sale, the cost of the asset disposed of and its related ac-cumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in net realized investment gains. The net book value of the Companys investments in land and buildings is included in real estate, whereas the remaining net book value of the Companys occupied land and buildings, furniture, fixtures and equip-ment is included in premises and equipment.

Unpaid Losses and Loss Adjustment ExpensesLiabilities for unpaid losses and loss adjustment expenses are based on case estimates or reports from ceding companies. Estimates of incurred-but-not-reported (IBNR) reserves are based on historical experience and management analysis.

Although the above-described amounts are based on estimates, management believes recorded liabilities for un-paid losses and loss adjustment expenses are adequate to cover the ultimate settlement cost of losses incurred. These estimates are continually reviewed and adjustments to such estimates are reflected in current operations.

PremiumsThe Company issues term premium policies. The term premium is earned on a pro-rata basis over the life of the policy.

Recent Guidance on Existing Accounting StandardsIn October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-26 Financial ServicesInsurance Accounting Standard Codification (ASC) 944: Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, which prescribes how costs incurred in the acquisi-tion of new and renewal contracts should be capitalized. The required implementation date of ASU No. 2010-26 was for fiscal years beginning after December 15, 2011. The Company early adopted ASU No. 2010-26 in 2011 and determined there is no impact on its deferral policy or the consolidated financial statements. In May 2011, the FASB issued ASU No. 2011-04Fair Value Measurement (ASC 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in ASU No. 2011-04 to result in a change in the application of the requirements in ASC 820. The required implementation date of ASU No. 2011-04 for non-public entities is fiscal years beginning after December 15, 2011. The Company adopted ASU No. 2011-04 and has determined that it will have no impact on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05Comprehensive Income (ASC 220): Presentation of Compre-hensive Income, which prescribes that an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous Statement of Comprehensive Income or in two separate but consecutive statements. The required implementa-tion date of ASU No. 2011-05 for non-public entities is fiscal years ending after December 15, 2012. The Company adopted ASU No. 2011-05 and elected to present the total of comprehensive income/(loss), the components of net income, and the components of other comprehensive income/(loss) in two separate but consecutive statements.





Recent Accounting PronouncementsIn December 2011, the FASB issued ASU No. 2011-12Comprehensive Income (ASC 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income which defers the requirement for entities to present reclassification adjustments, by component, on the face of the financial statements where net income and other comprehensive income are presented. The Company will monitor future updates related to this deferral.

ReinsuranceIn the normal course of business, the Company seeks to reduce losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance enterprises. Reinsurance premium and losses and loss adjustment expenses ceded under these arrangements are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contract.

Retirement Income Plans and Postretirement Benefit Plans Other than PensionsNoncontributory retirement income plans cover the vast majority of employees. The Companys funding policy is generally to contribute the net periodic pension cost each year, as determined pursuant to the guidance on Compensation Employee Benefits (ASC 715). However, the contribution for any year will not be less than the minimum required contribution, nor greater than the maximum tax-deductible contribution.

The Company provides certain health care and life insurance benefits for retired employees and their dependents. The plan is contributory; with retiree contributions adjusted annually, and contains other cost-sharing features, such as deductibles and coinsurance. Current service and interest costs of postretirement health care and life insurance benefits are expensed on an accrual basis.

Investment- and Fee-Related IncomeInvestment-related income primarily consists of interest and dividends from the Companys investment portfolio and income from leased office space, which is earned as services are provided, or over the term of applicable leases. Fee-related income primarily consists of fees for ancillary services.



Note 2. Investments

Debt and Equity SecuritiesThe following is a summary of securities at December 31, 2012:

Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value

Debt securities U.S. Treasury securities and obligations

of U.S. government agencies $ 354,200 $ 28,000 $ (1,700) $ 380,500 Obligations of states and political subdivisions 1,474,500 93,400 (1,300) 1,566,600Mortgage and asset-backed securities

Agency 851,100 50,700 (200) 901,600 Commercial 160,600 14,300 174,900 Residential 35,000 800 35,800 Other mortgage and asset-backed securities 143,300 12,900 156,200 U.S. corporate securities 1,196,200 95,200 (1,800) 1,289,600 Foreign government securities 561,900 26,700 (300) 588,300 Other debt securities 266,700 15,100 281,800Total debt securities 5,043,500 337,100 (5,300) 5,375,300Equity securities

Consumer Discretionary 294,700 183,900 (4,500) 474,100Consumer Staples 327,400 212,200 (4,900) 534,700Energy 318,300 233,400 (5,900) 545,800Financials 422,900 174,900 (1,000) 596,800Health Care 354,300 171,900 (1,800) 524,400Industrials 287,700 158,600 (6,600) 439,700Information Technology 384,300 434,700 (2,400) 816,600Mutual Funds (International and Emerging Markets) 518,400 170,000 (1,100) 687,300All other sectors 231,200 143,100 (3,800) 370,500

Total equity securities 3,139,200 1,882,700 (32,000) 4,989,900Total debt and equity securities $ 8,182,700 $ 2,219,800 $ (37,300) $ 10,365,200



Note 2. Investments (continued)

The following is a summary of securities at December 31, 2011:

Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value

Debt securities U.S. Treasury securities and obligations

of U.S. government agencies $ 279,300 $ 36,600 $ $ 315,900 Obligations of states and political subdivisions 1,384,100 92,000 (900) 1,475,200 Mortgage and asset-backed securities Agency 763,500 51,900 815,400 Commercial 151,200 12,400 163,600 Residential 9,700 3,000 (200) 12,500 Other mortgage and asset-backed securities 172,400 8,700 (100) 181,000U.S. corporate securities 1,279,700 69,900 (8,400) 1,341,200Foreign government securities 520,900 38,600 559,500Other debt securities 229,200 11,600 (600) 240,200

Total debt securities 4,790,000 324,700 (10,200) 5,104,500Equity securities

Consumer Discretionary 186,800 108,900 (6,300) 289,400Consumer Staples 387,600 241,700 (4,600) 624,700Energy 329,100 246,000 (5,200) 569,900Financials 430,800 60,000 (11,000) 479,800Health Care 282,300 134,600 (700) 416,200Industrials 288,200 141,300 (4,100) 425,400Information Technology 397,700 382,900 (7,400) 773,200 Mutual Funds (International and Emerging Markets) 464,000 102,100 (7,200) 558,900 All other sectors 171,600 112,300 (4,500) 279,400

Total equity securities 2,938,100 1,529,800 (51,000) 4,416,900 Total debt and equity securities $ 7,728,100 $ 1,854,500 $ (61,200) $ 9,521,400

During the years ended December 31, 2012 and 2011, proceeds from the sale of debt and equity securities were $3,076,800 and $3,135,900, respectively. The gross realized gains and (losses) on such sales totaled $347,700 and $(47,100), and $392,900 and $(51,300), in 2012 and 2011, respectively.



Note 2. Investments (continued)

The amortized cost and fair value of debt securities at December 31, 2012, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized Cost Fair Value

Due in one year or less $ 358,400 $ 363,400Due after one year through five years 1,383,700 1,460,700Due after five years through 10 years 1,746,100 1,892,400Due after 10 years 365,300 390,300 3,853,500 4,106,800Mortgage and asset-backed securities 1,190,000 1,268,500Total debt securities $ 5,043,500 $ 5,375,300

Under a securities lending program with an agent, the Company has temporarily loaned certain debt securities with a fair value of $300,300 and $261,100 at December 31, 2012 and 2011, respectively. At December 31, 2012 and 2011, the Company held total collateral values of $307,100 and $266,700 related to the securities lending program, of which cash collateral recognized in the Consolidated Balance Sheets were $125,900 and $139,300, respectively.

Included in the Companys debt security portfolio are securities with unrealized losses deemed to be temporary. The total unrealized loss on these securities was $5,300 (fair value of $448,600) at December 31, 2012, and $10,200 (fair value of $325,400) at December 31, 2011. The amount of loss that existed for 12 months or more was immaterial for both 2012 and 2011. In reaching its conclusion that these impairments are temporary, the Company considered issuer-specific circumstances as well as the fact that the Company has the intent and ability to hold these securities until they recover in value or mature, and it is not more likely than not that the Company will be required to sell before that time.

Included in the Companys equity security portfolio are securities with unrealized losses deemed to be temporary. The total unrealized loss on these securities was $32,000 (fair value of $238,700) at December 31, 2012, and $51,000 (fair value of $470,000) at December 31, 2011. The amount of loss that existed for 12 months or more was immaterial for both 2012 and 2011. In reaching its conclusion that these impairments are temporary, the Company considered the duration and severity of the decline as well as the near-term prospects of the issuer. The Company believes these securities will appreciate over time, and the Company has the ability and intent to hold these securities until such time.

During the years ended December 31, 2012 and 2011, net realized investment gains on other securities were $50,000 and $26,600, respectively.

Credit RiskAll investment transactions have credit exposure to the extent that a counterparty may default on an obligation to the Company. Credit risk is a consequence of carrying investment positions. To manage credit risk, the Company focuses on high-quality fixed-income securities, reviews the credit strength of all companies in which it invests, limits its exposure in any one investment and monitors the portfolio quality, taking into account credit ratings assigned by recognized credit-rating organizations.



Note 3. Fair Value

The valuation techniques required by the Fair Value Measurements (ASC 820) guidance are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions.

These two types of inputs create the following fair value hierarchy:

Level 1 Quoted prices for identical instruments in active markets.

Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Significant inputs to the valuation model are unobservable.

The Company retains independent pricing vendors to assist in valuing invested assets. In compliance with the Fair Value Measurements (ASC 820) guidance, the Company conducted a review of the primary pricing vendor, validating that the inputs used in that vendors pricing process are deemed to be market-observable as defined in the standard.

When available, the Company uses quoted market prices to determine the fair value of investment securities, and they are included in Level 1.

When quoted market prices are unavailable, the Company uses quotes from independent pricing vendors based on recent trading activity and other relevant information. Debt securities are priced by an independent vendor using evaluated market pricing models that vary by asset class. These models incorporate available trade, bid and other market information, and for structured securities also incorporate cash flow and, when available, loan performance data. The pricing models apply available market information through processes such as benchmark curves, bench-marking of similar securities, and sector groupings. The vendors also integrate observed market movements, sector news and relevant credit information into the evaluated pricing applications and models. These investments are included in Level 2 and are primarily comprised of the debt securities.

In infrequent circumstances, the pricing is not available from the pricing vendor, and is based on significant unobservable inputs. In those circumstances, the investment security is classified in Level 3.

The following table presents the Companys invested assets measured at fair value as of December 31, 2012:

Quoted Prices in Active Markets for Significant Other Significant Identical Assets Observable Inputs Unobservable InputsInvested Assets, at Fair Value Total (Level 1) (Level 2) (Level 3)

Debt securities, available for sale $ 5,375,300 $ 247,600 $ 5,127,700 $ Equity securities, available for sale 4,989,900 4,933,900 56,000 Total $ 10,365,200 $ 5,181,500 $ 5,183,700 $



Note 3. Fair Value (continued)

The following table presents the Companys invested assets measured at fair value as of December 31, 2011:

Quoted Prices in Active Markets for Significant Other Significant Identical Assets Observable Inputs Unobservable InputsInvested Assets, at Fair Value Total (Level 1) (Level 2) (Level 3)

Debt securities, available for sale $ 5,104,500 $ 366,600 $ 4,737,900 $ Equity securities, available for sale 4,416,900 4,313,900 103,000 Total $ 9,521,400 $ 4,680,500 $ 4,840,900 $

All debt securities are measured at fair value and are classified as Level 2 with the exception of short-term securities which are priced using quoted market prices and therefore classified as Level 1. See Note 2 for breakout of debt securities by category.

All equity securities are priced using quoted market prices and classified as Level 1 with the exception of certain mutual funds which are priced by the manager using other observable inputs and therefore classified as Level 2. See Note 2 for breakout of equity securities by category.

There were no transfers of securities between Levels 1 and 2 in 2012 or 2011.

Securities lending collateral in 2012 and 2011 consists of highly liquid investments, which would be classified as Level 1 in the fair value hierarchy.

Note 4. Membership Credit

The Companys Board of Directors approved a membership credit to policyholders for 2011 and 2010. Policyholders were eligible for the membership credit upon renewal of their policies with inception dates between June 30, 2010 and June 29, 2011. The membership credit was recorded as a reduction of net premium earned.

Note 5. Reinsurance

The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. While such evaluations minimize the Companys exposure, the ultimate collection of reinsurance recoverables depends on the financial soundness of the individual reinsurers. Gen-erally, the reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible.

The effect of reinsurance on written premium is as follows: Year ended December 31

2012 2011

Gross written premium $ 5,406,400 $ 5,164,100Ceded written premium (1,721,100) (1,614,800)Net written premium $ 3,685,300 $ 3,549,300

Ceded losses incurred for the years ended December 31, 2012 and 2011, were $1,038,700 and $1,484,800, respectively.



Note 6. Unpaid Losses and Loss Adjustment Expenses

Activity in the net liability for unpaid losses and loss adjustment expenses is summarized as follows: Year ended December 31

2012 2011

Net balance at January 1 $ 3,322,200 $ 2,615,900Net incurred related to: Current year 2,287,400 3,373,300 Prior year (93,500) (274,200)Total incurred 2,193,900 3,099,100Paid related to: Current year 949,300 1,410,000 Prior year 1,507,700 982,800Total paid 2,457,000 2,392,800 Net balance at December 31 $ 3,059,100 $ 3,322,200

As a result of changes in estimates of insured events related to prior years, the provision for losses and loss adjustment expenses decreased by $93,500 and $274,200 in 2012 and 2011, respectively. The decreases in both years were due to reductions of incurred-but-not-reported (IBNR) reserves based on actual experience, and decreases on a small number of individual losses. In establishing reserves for property losses there is some uncertainty in managements estimates that cause these estimates to differ from ultimate payments.

In establishing the liability for unpaid losses and loss adjustment expenses related to asbestos, environmental and other mass tort-related claims, which applies only to business that is now in runoff, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy and management can reasonably estimate the Companys liability. Liabilities have also been established to cover additional exposures on both known and unasserted claims. Estimates of the liabilities are reviewed continuously. Developed case law and adequate claim history do not exist for such claims, primarily because significant uncertainty exists about the outcomes of coverage litigation and whether past claim experience will be representative of future claim experience.

The Company is the subject of various asserted and unasserted claims and lawsuits covering a wide variety of issues that arise out of the normal course of its business activities. Contingent liabilities arising from litigation and other matters are not considered material in relation to the financial position or operations of the Company.



Note 7. Real Estate and Premises and Equipment

Real estate and premises and equipment at December 31, 2012 and 2011 are summarized as follows:

2012 2011

Land and buildings $ 1,012,100 $ 916,600Furniture, fixtures and equipment 299,400 304,900Accumulated depreciation (534,800) (500,900)Total $ 776,700 $ 720,600

During 2012 and 2011, depreciation expense for real estate and premises and equipment was $49,300 and $48,200, respectively.

Note 8. Leases

In connection with its various operating offices throughout Asia, Australia, Europe, North America and South America, the Company leases office space, automobiles, and equipment. These leases are classified as operating leases.

Future minimum lease payments at December 31, 2012, under operating leases with terms of one year or more, are in aggregate $141,400. The future minimum lease payments for each of the five succeeding years from 2013 to 2017 are $37,100, $31,400, $22,500, $15,400 and $13,300, respectively.

During 2012 and 2011, rent expense for all operating leases was $44,000 and $47,600, respectively.

Note 9. Income Taxes

Current income taxes primarily represent the U.S. federal and foreign tax expense/(benefit). The most significant components of deferred tax liabilities relate to net unrealized gains on investment securities, benefit plans expense and depreciation. Deferred tax assets primarily represent the U.S. tax effects of temporary differences relating principally to discounting of unpaid losses and loss adjustment expenses, adjustments to the net reserve for unearned premium, the write-down of other than temporarily impaired investments and the pension and postretirement surplus adjustment. The Company has established a valuation allowance for its foreign subsidiarys unrelieved foreign tax.

The components of the net deferred tax liability at December 31, 2012 and 2011, are as follows:

2012 2011

Total deferred tax liabilities $ (1,145,200) $ (998,000)

Total deferred tax assets 680,800 755,800Valuation allowance (26,200) (25,000)Net deferred tax assets 654,600 730,800

Net deferred tax liability $ (490,600) $ (267,200)



Note 9. Income Taxes (continued)

The following is the current and deferred income tax expense/(benefit) for the years ended December 31, 2012 and 2011:

2012 2011

Current income tax expense/(benefit) $ 260,100 $ (94,300)Deferred income tax expense 96,600 24,700Total income tax expense/(benefit) $ 356,700 $ (69,600)

The Company has not recognized a deferred tax liability for the undistributed earnings of certain of its wholly owned foreign subsidiaries that arose in 2012 and prior years, because the Company does not expect those unremitted earnings to reverse and become taxable to the Company in the foreseeable future. A deferred tax liability will be recognized when the Company expects that it will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investment. As of December 31, 2012, the undistributed earnings of these subsidiaries were approximately $129,000.

In 2012, effective income tax rates differed from current U.S. statutory rates primarily as a result of the dividends received deduction, tax-exempt income and the effect of foreign operations.

Income tax paid during 2012 and 2011 was $252,400 and $102,000, respectively. In addition, the Company received income tax refunds of $133,300 and $24,000 during 2012 and 2011, respectively.

The Companys unrecognized tax benefits are immaterial and it does not expect any material changes within 12 months of the reporting date.

Note 10. Retirement Income Plans and Postretirement Benefit Plans Other than Pensions

The Company sponsors a noncontributory retirement income plan covering the vast majority of employees. The benefits are generally based on years of service and the average of the highest consecutive 60 months of the employees compensation within the 120 months prior to retirement. Generally, the Companys funding policy is to maintain a sufficiently funded level to ensure benefit security and to vary contribution levels as appropriate to business conditions. The Company also has supplemental retirement plans that are noncontributory defined benefit plans covering certain employees.

The Company provides health care and life insurance benefits for certain retired employees and their dependents. Employees not eligible for benefits under pre-merger plan provisions, under age 30 as of January 1, 2000, or hired after January 1, 2000, are ineligible for benefits. Other employees may become eligible if they meet certain age and service requirements. The plan is generally contributory; with retiree contributions adjusted annually, and contains other cost-sharing features, including deductibles and coinsurance.



Note 10. Retirement Income Plans and Postretirement Benefit Plans Other than Pensions (continued)

Obligations and funded status are as follows:

Pension and Supplemental Benefits Other Benefits Dec. 31, 2012 Dec. 31, 2011 Dec. 31, 2012 Dec. 31, 2011

Fair value of plan assets $ 2,022,400 $ 1,833,100 $ 126,300 $ 110,200Benefit obligations 2,028,800 1,782,800 162,800 159,300Funded status, end of year $ (6,400) $ 50,300 $ (36,500) $ (49,100)

The accumulated benefit obligation for the pension and supplemental benefits plans were $1,745,400 and $1,537,100, for December 31, 2012 and December 31, 2011, respectively.

Amounts recognized in the Consolidated Balance Sheets are as follows:


Asset $ 132,600 $ 165,200 $ $ Liability (139,000) (114,900) (36,500) (49,100)Total $ (6,400) $ 50,300 $ (36,500) $ (49,100)

Pretax amounts included in accumulated other comprehensive income are as follows:


Net actuarial loss $ 869,500 $ 816,400 $ 59,300 $ 69,800Prior service cost/(credit) 3,200 5,400 (300) (300)Transition obligation 1,000Total $ 872,700 $ 821,800 $ 59,000 $ 70,500

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with an accumulated benefit obligation in excess of plan assets are as follows:

Dec. 31, 2012 Dec. 31, 2011

Projected

Download - Factory Mutual 2012 Annual Report

Top Related