A.M. Best Affirms Ratings of Fireman’s Fund

April 18, 2003

A.M. Best Co. has affirmed the financial strength ratings of A (Excellent) on the pool members of the Novato, Calif.-based Fireman’s Fund Insurance Companies (FFIC). The ratings are being removed from under review and the outlook remains negative.

FFIC is a wholly-owned subsidiary of Allianz AG (Allianz) (Munich, Germany) which has a financial strength rating of A+ (Superior).

These ratings reflect FFIC’s strategic importance within Allianz’s global insurance operations, which has been demonstrated through Allianz’s historical tangible support and commitment to FFIC. Allianz has recently provided FFIC with Keep Well Agreements affording its surplus substantial protection against loss emergence from 2002 and prior accident years and any slippage in FFIC’s planned combined ratios for 2003. These agreements are effective through at least Dec. 31, 2005, and can be extended thereafter at Allianz’s option.

In 2002, Allianz contributed almost $1.8 billion of capital to FFIC and provided inter-company reinsurance for the company’s asbestos and environmental (A&E) exposures. Allianz charged FFIC almost $1.3 billion for this cover. Furthermore, the ratings consider the underlying improvement in more recent accident year underwriting trends and FFIC’s prospective earnings capability. FFIC has taken steps to improve underwriting results and maintain its leadership position within the specialty commercial and upscale personal lines markets. It continues to maintain strong brand name recognition, well-established agency relationships and substantial service capabilities.

Offsetting these favorable considerations is FFIC’s protracted record of reporting poor operating results that culminated in 2002 with the emergence of approximately $1 billion in prior year losses, $750 million of which related to strengthening of A&E liabilities with the remainder driven by discontinued lines of business. The company’s 2002 GAAP combined ratio was 141.4 percent and included 33.3 points relating to adverse reserve development and discontinued lines. The company’s ongoing books of business generated a GAAP combined ratio for the 2002 accident year of 108.1 percent reflecting the improved underwriting trends cited above. Over the previous three years, FFIC’s underwriting losses outpaced net investment income, generating negative pre-tax operating returns on revenue and equity. In recent years, operating losses were further compounded by significant realized and unrealized capital losses emanating from FFIC’s equity holdings, which have since been substantially reduced in an effort to mitigate this exposure going forward.

Consequently, FFIC’s risk adjusted surplus position, excluding the support provided by the aforementioned Keep Well Agreements, has deteriorated to a level below A.M. Best’s expectations for an Excellent rated company. Moreover, the assignment of a negative outlook indicates that despite Allianz’s support, FFIC’s sustainability of the ratings is contingent upon its ability to take full advantage of improved market conditions and to execute its business strategy in accordance with A.M. Best’s expectations. Future indications of poor performance will likely result in a downgrading of the ratings.

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