A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of B++ (Good) of Toronto-based Transamerica Life Canada.

A.M. Best also has revised the outlook to positive from negative and affirmed the issuer credit rating of “bbb+” of Transamerica Life Canada.

Transamerica Life Canada is an indirect, wholly owned subsidiary of the Dutch firm AEGON N.V., one of the world’s largest providers of life insurance, pensions and long-term savings and investment products.

The revised outlook recognizes the recent improvement in Transamerica Life Canada’s financial results, A.M. Best says. For 2009, Transamerica Life Canada reported net income of $87.2 million after experiencing significant losses in 2008 and 2007, due primarily to reserve strengthening charges related to segregated fund guarantee payments and changes in actuarial assumptions.

In addition, A.M. Best notes Transamerica Life Canada’s enhanced risk management practices, specifically the application of more comprehensive hedging strategies. In addition, the company has maintained adequate liquidity to fund the considerable level of segregated fund maturities that occurred in the first quarter of 2010.

Transamerica Life Canada underwent a change in leadership in September 2008, which coincided with the onset of the global financial crisis. Since that time, the company has improved its risk profile by implementing static put hedging programs and smaller dynamic residual programs for its internally and externally managed segregated fund portfolios, A.M. Best says.

With two additional macro hedge programs implemented in 2009, the company has now hedged over 90% of its equity risk exposure. Also, Transamerica Life Canada has discontinued product offerings with more aggressive features and has fully reflected the cost of risk mitigation in its pricing.

The company saw over $1 billion of its segregated fund guarantees mature in the first quarter of 2010 and came through the event without any operational or administrative issues as policyholder obligations were fully met by making all maturity payments, including significant top-up amounts.

Despite the increased hedging, Transamerica Life Canada’s profitability still remains sensitive to equity market performance as a result of the remaining equity basis risk on hedged business, A.M. Best says.

The rating agency notes that Transamerica Life Canada recorded a net of loss $35 million for the first quarter of 2010 due mostly to losses associated with the aforementioned segregated fund maturities.

“As a result, A.M. Best believes that Transamerica Life Canada’s earnings will continue to be pressured for the remainder of 2010 as global stock markets experience higher relative volatility,” A.M. Best says.

“The ratings of Transamerica Life Canada reflect its solid market positions in its core business lines, multi- channel distribution platform, reduced risk profile and adequate capitalization,” A.M. Best concludes

IE