A.M. Best Co. downgraded its outlook Wednesday for Employers Direct Insurance Co. to “negative” from “stable”, reflecting rising medical claims costs that have forced the Thousand Oaks workers’ comp insurer to raise its reserves.

In altering the outlook, the insurance industry rating agency also cited “ongoing challenges associated with the competitive market conditions” in the California workers’ compensation marketplace.

A.M Best, however, did affirm the “A-” (excellent) financial strength rating and “A-” issuer credit rating of Employers Direct, which in 2007 became part of Alleghany Corp. of Wilmington, Del.

“The ratings also recognize the $50 million capital contribution made (to Employers Direct) by Alleghany in 2007 and Alleghany’s financial flexibility and historical track record of profitably operating well capitalized insurance subsidiaries,” said A.M. Best in its announcement.