A.M. Best Downgrades Fireman’s Fund

August 30, 2001

A.M. Best Co. downgraded the financial strength rating of “A++” (Superior) to “A” (Excellent) for Fireman’s Fund Insurance Companies (FFIC), Novato, California.

A.M. Best indicated the rating action reflects a change in its opinion concerning the treatment of FFIC as a core subsidiary of the Allianz A. G., Munich, Germany. This change is the result of the recent and significant deterioration in the overall financial position of FFIC and its failure to meet targeted earnings as set out by its parent and communicated to A.M. Best. Accordingly, FFIC no longer qualifies for core treatment under A.M. Best’s group rating criteria.

A.M. Best further stated that during the fourth quarter of 2000, FFIC’s surplus position was eroded by $956 million of unrealized capital losses stemming, in large part, from its significant position in equities. Poor underwriting results and stockholder dividend payments to its parent contributed to a further depletion of capital resulting in an overall reduction of 45% to FFIC’s surplus for the year. Therefore, despite a subsequent rebound in the overall market value of its equity portfolio and a $166 million capital infusion in 2001, FFIC’s level of capitalization has fallen below A.M. Best’s expectations for a superior rated company.

A.M. Best further noted that FFIC’s underwriting results, which have been impacted by intensely competitive market conditions, particularly with respect to its large California workers compensation book, have consistently underperformed in the commercial lines market. The assignment of the parent’s group rating to FFIC in 1998 anticipated improved results in line with Allianz’s expectations.

While A.M. Best believes FFIC’s prospects for more favorable accident year underwriting performance are achievable given the improved pricing in commercial classes of business, potential prior year loss could impede the recovery process. Although recent actuarial studies indicated that core reserves remain within a reasonable range, the group’s sizable long-tail casualty reserve position relative to its reduced capital base places additional pressure on the adequacy of reserves. As such, even a modest level of deterioration could have a material impact on the group’s surplus. Consequently, the group’s rating outlook is contingent upon the continued demonstrated support of the parent.

Offsetting these negative rating factors is FFIC’s solid stand-alone capitalization, which is further enhanced by the superior financial strength and flexibility of its ultimate parent, the Allianz A. G. Additionally, the rating considers FFIC’s leading market position within the specialty commercial and upscale personal lines segments, strong brand name recognition, well-established agency relationships and substantial service capabilities.

These attributes strengthen FFIC’s strategic position and role within the Allianz organization, as its flagship non-life insurance operation in the United States. In 2001, Allianz has provided the group with explicit financial support and demonstrated closer operating control by selecting a new senior management team. This team’s primary focus is to restore operating profitability over the near-term. Subsequently, FFIC has developed and is implementing a business strategy aimed at improving underwriting performance within core businesses and reducing operating costs over the medium-term. At the same time, the strategy provides for an orderly exit from those business segments which do not provide the opportunity for near-term profitability.

The rating applies to the ten-member intercompany pool of FFIC and its eleven reinsured subsidiaries only. The “A++” (Superior) financial strength rating of the Allianz Insurance Group, Munich, Germany is unchanged.

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