On Friday, A.M. Best Co. said it affirmed the financial strength rating of ‘A’ (Excellent), but downgraded the issuer credit rating (ICR) to “a” from “a+” of California-based Fireman’s Fund Insurance Company and its intercompany pool participants and reinsured affiliates, collectively referred to as Fireman’s Fund.

The outlook remains stable for all of the ratings.

Best said the FSR affirmation “recognizes the strategic importance of the U.S. market presence of Fireman’s Fund to the global insurance operations of its German-based ultimate parent, Allianz SE. Critical to the ratings, Fireman’s Fund has benefitted from substantial support via capital and reinsurance from Allianz SE, demonstrating both implicit and explicit parental assistance. The FSR further reflects the group’s adequate level of risk-adjusted capitalization, as well as its niche market expertise as a provider of insurance products to high net worth individuals and in specialty commercial niches.”

Best explained that the downgrade of the ICR “reflects the deterioration in Fireman’s Fund’s underwriting performance in recent years. Since 2010, the companies’ underwriting results have been negatively impacted by increased catastrophe losses and significant adverse development of prior years’ loss reserves, particularly those related to the group’s workers’ compensation, commercial multi-peril and professional liability lines of business and historical asbestos and environmental exposures.

“Multi-peril crop-related losses contributed to the deterioration in underwriting performance in 2012. Net investment income has declined in recent years as well, driven by declining yields (reflective of the persistent low interest rate environment). The combination of these factors has resulted in a decline in operating results, culminating in net losses in 2011 and 2012.”

The ratings report noted that while management “has taken and continues to implement steps to improve underwriting and operating performance, reported results have not reflected these actions to date. It is expected that it will take several years for the group to generate a sustainable, consistent profit.”

Best said it expects “that Allianz SE will continue to provide support to the group during this period to maintain risk-adjusted capitalization at a level that is supportive of the ratings, and that underwriting and operating performance will demonstrate improvement as a result of management’s actions.”

Best also indicated that it “believes Fireman’s Fund is well positioned at its current rating level and does not anticipate favorable rating actions in the near to mid-term.” However, Best added that “negative rating actions may occur for Fireman’s Fund over the near-to-midterm if there is a continued decline in the group’s underwriting profitability, considerable deterioration in its risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio,” or if Best “determines that Fireman’s Fund’s strategic importance to Allianz SE no longer warrants the same level of rating enhancement.”

The affirmation of the FSR of ‘A’ (Excellent) and the downgrade of the ICR to “a” from “a+” applies to Fireman’s Fund Insurance Company and its following intercompany pool participants and reinsured affiliates:

  • American Automobile Insurance Company
  • National Surety Corporation
  • The American Insurance Company
  • Associated Indemnity Corporation
  • Chicago Insurance Company
  • Fireman’s Fund County Mutual Insurance Company
  • Fireman’s Fund Indemnity Corporation
  • Fireman’s Fund Insurance Company of Hawaii, Inc.
  • Fireman’s Fund Insurance Company of Ohio
  • Interstate Fire & Casualty Company

Source: A.M. Best