A.M. Best Co. has downgraded the financial strength ratings to A (Excellent) from A++ (Superior) for Allianz Insurance Co. of Canada and its affiliated company, Trafalgar Insurance Co. of Canada, both of Toronto.

Accordin to A.M. Best, these actions reflect the ratings agency’s opinion concerning the treatment of Allianz Canada as a core subsidiary of Allianz AG, Munich, Germany. This is the result of the recent and significant deterioration in the overall financial position of Allianz Canada in failing to meet targeted earnings, as communicated to A.M. Best. Accordingly, Allianz Canada no longer qualifies for core treatment under A.M. Best’s group rating criteria.

In 2000 and 2001, poor underwriting results eroded Allianz Canada’s very strong surplus position, and thus, its level of capitalization fell below A.M. Best’s expectations for a superior-rated company. Allianz Canada’s underwriting results — which have for two consecutive years underperformed — have been impacted by intensely competitive market conditions and increased claims frequency, particularly with respect to its large Ontario auto business.

In 1998, the assignment of Allianz AG’s group rating to Allianz Canada anticipated it maintaining its historical good results, which were in line with the parent’s expectations. However, while A.M. Best believes Allianz Canada’s prospects for more favorable accident-year underwriting performance are achievable — given the improved pricing in personal auto business — rising claim costs may slow the recovery process.

Offsetting these negative rating factors is the superior financial strength and flexibility of Allianz AG. These attributes strengthen Allianz Canada’s strategic position and role within the Allianz AG organization. Furthermore, in 2001, Allianz AG provided the Canadian group with explicit financial support. Allianz Canada’s primary focus is to restore operating profitability over the near-term. Subsequently, Allianz Canada has developed and is implementing a business strategy aimed at improving underwriting performance within core businesses.