ANNUAL REPORT 2014 EXECUTIVE MESSAGE MOMENTUM

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1 ANNUAL REPORT 2014 EXECUTIVE MESSAGE MOMENTUM

2 EXECUTIVE MESSAGE 2014 WAS A VERY SUCCESSFUL YEAR, from both an insurance and investment perspective. We maintained very high client retention, recorded modest new business success in a highly competitive environment, and provided our policyholder-owners with their seventh membership credit since Concurrently, we continued to focus on becoming a more efficient organization while achieving all of our objectives to improve our products and services. Our combined ratio of 79.4 percent was exemplary for the second straight year, and the combination of strong underwriting performance and investment results increased our surplus by 9.5 percent to US$10.6 billion. These outstanding results are indicators of the strength of our mutual business model, our balance sheet, the trusted partnerships we have formed with our clients to ensure business resilience, and the dedication of our employees around the world to deliver our products with a single-minded commitment to serve our policyholders. Review of 2014 In April 2014, our board of directors approved a membership credit of approximately US$465 million to eligible policyholders renewing between June 30, 2014, and June 29, This marks our seventh membership credit and highest total dollar amount to date. By the end of June 2015, we will have provided nearly US$2.5 billion in total membership credits to our mutual owners since The membership credit process epitomizes the core value of our mutual structure. It is our clients focus on increasing the resilience of their business that reduces the frequency and severity of losses, making it possible for us to share the benefits of positive results. Despite the inherent volatility of the business, we have consistently established the practice whenever conditions make it possible. We continued to improve our processes and capabilities in many areas, with the resolve to be more efficient and further distinguish our product in a highly competitive marketplace. A collaborative spirit and shared commitment to resilience sustains the risk management partnerships we have with our clients. In 2014 our clients did their part by improving physical risk and reducing human element risk at their locations, making significant gains in both areas. To cite one substantial measure, they installed sprinklers in 40 million square feet (3.7 million square meters) of facilities worldwide. For our part, we continued to improve our processes and capabilities in many areas, with the resolve to be more efficient and further distinguish our product in a highly competitive marketplace. Among these efforts, we continued to focus on the prominent and emerging risks for many of our clients, including risks associated with large machinery and equipment and flood. FM GLOBAL ANNUAL REPORT

3 With respect to flood, one of the world s most costly natural hazards, we increased our capabilities to help clients identify, manage and mitigate their flood risk; further expanded our global flood-mapping capabilities; and continued to use our research and approvals resources to provide more options to overcome this hazard including increasing the availability of FM Approved flood loss prevention products on a worldwide basis. Coupled with our unique understanding of risk, we continued to develop advanced analytics and predictive modeling capabilities, benefiting our policyholder-owners in the areas of risk assessment and risk improvement. Mid-year, we introduced the FM Global Resilience Index, the first data-driven tool and repository that ranks the business resilience of 130 countries. Using this index, decision-makers are able to generate insights about risk and opportunities in their supply chain to help guide their operating strategy. We continue to provide our clients market-leading timeliness in terms of delivering our insurance policies. Despite the innate complexity of our insurance products, 86 percent of policies were delivered on or before the effective date of the contract, and 96 percent were delivered within 30 days. The quality and value of our products and services continue to be recognized by industry ratings agencies, analysts and media channels. Global Finance magazine once again named FM Global World s Best Supply Chain Risk Insurance Provider. We were also honored with a BEST Award from the Association for Talent Development and recognized with an Innovation award from Business Insurance for our SimZone training facility Premium Trends For the second year in a row, the lack of insured natural disasters, combined with new and abundant forms of alternative reinsurance capacity and strong balance sheets, created a competitive marketplace. Despite the competitive environment, we retained more than 94 percent of our clients, which reinforces the value placed in the strengths that are inherent in our mutual partnership whether it be our in-house claims capabilities, global consistency or financial stability in all market conditions. TOTAL GROSS PREMIUM IN FORCE 5, , , , ,528.7 IN US$ MILLIONS NON-NORTH AMERICA GROSS PREMIUM IN FORCE 1, , , ,350.2 IN US$ MILLIONS 1, FM GLOBAL ANNUAL REPORT 2014

4 However, competition for new business was significant, and we did not meet our goals for adding new clients. Despite our strong retention rate, the shortfall in new business acquisition, combined with the foreign exchange rate impact of a strengthening U.S. dollar, resulted in a 1.9 percent decline in gross in-force premium. From a geographical standpoint, Australia and Europe remained significantly more competitive than North America. Affiliated FM also experienced a decline in premium, reflecting the more competitive nature of our middle-market business. While we were again challenged in writing new business, we are optimistic that we can improve upon our results in On a consolidated basis, FM Global (large commercial property) and Affiliated FM (middle-market property) represent 96.2 percent of our overall in-force premium, with Mutual Boiler Re and FM Global Cargo representing the balance. Consolidated net premium earned increased by 8.2 percent to US$4.1 billion, excluding the impact of 12 months of the membership credit. Loss Trends Our consolidated loss ratio for 2014 was 52.3 percent. The loss ratio, excluding membership credit, was 46.7 percent. This reflects the reduced number of insured natural disaster losses worldwide, as the number of claims submitted for natural disasters approached historic lows. The resulting loss ratio of 11.8 percent from natural disasters was slightly higher than prior year but still well below our five-year average of 23.6 percent. Our 2014 risk loss ratio of 31.6 percent was a slight increase over our 2013 ratio of 29.6 percent, and very close to our five-year average of 30.7 percent. Risk losses stem predominantly from fire and explosion and occur disproportionately at unsprinklered locations. Expense Trends Our 2014 expense ratio of 27.1 percent was slightly above our 2013 result. However, excluding the effect of the membership credit, our 2014 expense ratio of 24.2 percent was slightly lower than our 2013 measure of 24.9 percent. As a mutual company that has made a value promise to its clients, we remain committed to the delivery of highquality services worldwide, combined with careful expense management. A designated business process improvement team continues to identify and implement solutions that create efficiencies in business processes. The team s work, widely embraced in the organization, is already making a difference in our expenses. We are continuing to leverage technology, including mobile solutions that will streamline the way we deliver our products and services and contribute to our efficiency. LOSS RATIO 100% 54.2% EXPENSE RATIO 50% 28.6% 95.9% 60.6% Includes additional reserves for discontinued lines of business 25.1% 25.1% 51.4% 26.3% 52.3% 27.1% FM GLOBAL ANNUAL REPORT

5 Employee Trends Over the last three years, our workforce has grown by 3.8 percent. As our clients continue to expand outside of North America, our employee growth follows the same pattern. However, we lack similar economies of scale in some of the newer geographical territories, leading to a disproportionate level of resource allocation. The stability and training of our workforce is the primary source of our strength as a knowledge-based company. The average employee tenure at FM Global is 13 years, and our employee turnover rate was 6.4 percent in 2014 versus 6.7 percent in Moreover, employees completed more than 9,100 days of classroom training at an average cost of US$2,200 per employee, and another 27,000 hours of online training. Investments and Surplus Our investment portfolio produced a total return on assets of 7.1 percent. Investment allocations in profitable equity markets and outperformance in the bond portfolios helped our overall relative performance. Our investment performance and combined ratio of 79.4 percent helped increase surplus by 9.5 percent to US$10.6 billion. Both A.M. Best and Fitch reaffirmed our ratings at A+ and AA, respectively, and we have an A+ interactive rating from Standard & Poor s. We will continue to leverage our surplus for the benefit of our policyholder-owners and continue with our efforts to drive down our cost of doing business. Governance After long and valued service of more than 40 years, Shivan S. Subramaniam retired as chief executive officer of the company on December 31, His leadership was instrumental in effecting the merger that created FM Global. He served with distinction as the company s first chief executive officer and remains chairman of the board of directors. He is succeeded as chief executive officer by Thomas A. Lawson, who retains his title as president. Our board of directors, eight advisory boards and five risk management executive councils are the heart of our governance as a mutual company. They ensure our clients will always be front and center in determining FM Global s long-term strategy. We are grateful for the support and oversight they provide. In 2014 we welcomed two new members to our board of directors. They are Colin Day, Essentra plc chief executive, and a longtime member of our Europe Advisory Board; and Stuart Parker, USAA chief executive officer. We look forward to working with them both. 8 FM GLOBAL ANNUAL REPORT 2014

6 Looking Ahead We will reflect on 2014 as one of the insurance industry s best years, setting the stage for a year ahead that should be just as competitive. Adding to this challenge, a growing number of our competitors are trying to emulate our business model (specifically our engineering and loss prevention approach) because our underwriting results continue to significantly outpace the rest of the industry over the long term. Our emphasis in 2015 is to focus on flawless execution of our business model and deliver value to our clients by providing them with scientifically based, cost-effective risk management and insurance solutions that assist them in making their businesses more resilient. We will continue to leverage our surplus for the benefit of our policyholderowners and continue with our efforts to drive down our cost of doing business. Once again, our financial results reinforce the core strength of mutuality and the solid relationships we have formed with clients. While the financial numbers speak volumes, it s our people who really make the difference. Our success would not be possible without a knowledgeable, caring and dedicated workforce solely focused on the needs of our clients. As an organization, we are committed to providing them with the skills and resources they need to grow and flourish. We thank our employees for all they do to make us successful. Thomas A. Lawson President and Chief Executive Officer Shivan S. Subramaniam Chairman of the Board FM GLOBAL ANNUAL REPORT