S&P Lowers FSR for Fireman’s Fund, Some Subs

Standard & Poor’s Ratings Services has lowered its counterparty and financial strength ratings on Fireman’s Fund Insurance Co. (FFIC) and some of its rated subsidiaries and its financial strength ratings on other units to ‘A’ from ‘A+’. The rating outlook remains negative.

The ratings were lowered because of Standard & Poor’s incremental concern regarding the long-term strategic importance of FFIC to parent company Allianz AG. Purchased in 1991 by Allianz AG, FFIC has experienced significant strategic and financial challenges over time. Although the insurer’s current financial performance is good and continues to rebound after substantial losses in 2001 and 2002, Standard & Poor’s views FFIC as incrementally less strategically important to its parent group today.

The ratings on FFIC are based on the continued financial flexibility afforded to it by being a member of the Allianz AG group, improving operating earnings, and a strong amount of capital. Partially offsetting these strengths is a lack of market leadership in the U.S. P/C marketplace, increased competitive pricing in the marketplace, and below-average quality of capital.

The continued negative outlook reflects Standard & Poor’s desire to see a further improved and sustainable earnings track record under new Chief Executive Officer Charles Kavitsky, lack of material adverse reserve development into 2005, and improvements in the quality of the capital structure before considering a stable rating outlook.

Outlook

Standard & Poor’s expects FFIC to report improved earnings in 2004 and 2005 due to strong profit from ongoing businesses and reduced earnings drag from discontinued business lines and commuted reinsurance. Net income of at least $475 million is expected in 2004 with continued income growth in 2005. FFIC is expected to generate a combined loss and expense ratio of about 96%-97% in 2004, and again in 2005. Standard & Poor’s expects FFIC to maintain a Standard & Poor’s capital adequacy ratio (CAR) of at least 135% and slowly begin strengthening the quality of its capital base by replacing existing intercompany support with retained earnings, prospectively.

In addition, Standard & Poor’s expects FFIC to maintain existing reinsurance protection for potential adverse asbestos and environmental (A&E) reserve development, and Allianz AG to maintain some explicit support for potential adverse non-A&E reserve development at FFIC.

Major rating factors

— Good competitive positioning. FFIC maintains good competitive positioning in the U.S. P/C marketplace based on its top-30 market share, a strong and sizable independent broker distribution platform, and a competitive array of products.

— Good operating performance. Full-year 2003 and midyear 2004 operating performance continues to improve after significant losses in 2002 and 2001. In 2003, FFIC generated net income of $233 million and a combined loss and expense ratio of 102.5%. Midyear 2004 net income totaled $199 million.

— Strong capital strength. FFIC maintains strong capital strength reflected by a Standard & Poor’s CAR of 138%, although the quality of the capital base is below average due to an over-weighting of intercompany support.

— Investments. The insurer maintains a prudent asset allocation that has been reweighted in recent years to reduce a previously high exposure to common equities. Of invested assets, 87% are now invested in bonds, of which only 4% are below investment grade in credit quality.

— Very strong financial flexibility. FFIC continues to benefit from the financial resources of its parent group, Allianz AG.