A.M. Best Co. has downgraded the financial strength rating to A (Excellent) from A+ (Superior) of Transamerica Life Canada (TLC) (Scarborough, Ontario) and removed it from under review. The rating outlook is stable.

This rating action reflects the challenges TLC faces from increasing competition in the Canadian life marketplace, reduced earnings in 2002, along with the significant capital required to support regulatory requirements on its segregated funds portfolio and earnings exposure to equity market volatility.

A.M. Best says the competitive landscape in Canada has changed significantly and is increasingly dominated by large organizations with diversified sources of earnings and significant scale advantages. TLC’s current operating performance does not meet A.M. Best’s expectations for a Superior rating. Moreover, a portion of TLC’s earnings depends upon fee income from its segregated funds, which have declined in value over the last two of years.

TLC’s rating reflects its favorable market position in its core business lines, very adequate capitalization and profitability. The rating also considers the significant financial support received from its ultimate parent, AEGON N.V., which has enabled TLC to maintain an adequate risk-adjusted capital position despite very significant regulatory capital requirements on its segregated funds portfolio.

The ratings agency says TLC’s strong competitive position in individual life and wealth management products is enhanced by its large independent distribution network, innovative products and relatively low unit costs.

Although the mature nature of the Canadian marketplace presents formidable challenges to growth, A.M. Best believes TLC’s diversified distribution strategy will enable it to remain a competitive force in marketing traditional and universal life and investment products. In addition, TLC’s strategic alliances with mutual fund companies to market its segregated funds should result in sales expansion in its wealth management business segment.