Allianz Ins Co Canada & Trafalgar Asgnd AA- Rtg By S&P.

LONDON--(BUSINESS WIRE)--Standard & Poor's CreditWire 11/6/98-- Standard & Poor's today assigned its double-'A'-minus counterparty credit and financial strength ratings to Allianz Ins. Co. of Canada and Trafalgar Insurance Co. (together referred to as AZ Canada). This is based on AZ Canada's strategic importance to Allianz AG (triple-'A'/Stable/--). The major rating factors are AZ Canada's niche approach to underwriting commodity lines of business, its ability to service the parent's international commercial exposures in its region, conservative balance sheet, and a competitive expense structure. Offsetting these strengths are modest operating performance and challenging market conditions. Major Rating Factors:

-- Strategically important to the Allianz Group of companies: AZ Canada is the vehicle through which Allianz AG hopes to penetrate further the Canadian property casualty market. This market is integral to the group's North American strategy. Subject to approval by the Office of the Superintendent of Financial Institutions (OSFI), Allianz AG's stakes in Canada have risen through the acquisition of AGF. Allianz AG will continue to support the growth of AZ Canada.

-- Niche underwriting approach: In November 1993, AZ Canada implemented a market segmentation approach that has meant a dramatic improvement in operating performance. The key personal lines market niches are senior drivers, government employees, Costco members, and employees of major corporations. These segments have proved to have more favorable underwriting characteristics than an undifferentiated book.

-- Product portfolio and service capabilities of the International & Special Risk Division (ISRD): In addition to specialty commercial business originated in Canada, this division services all the Canadian business of Allianz's international clients. Standard & Poor's believes this division offers important diversification to AZ Canada and is a competitive advantage when competing against international companies like AXA, Zurich, and General Accident. Although ISRD remains modest in relative size (13% of gross premiums

written), it is experiencing rapid growth. Premiums have almost doubled in the past five years.

-- Streamlined expense structure: AZ Canada's general expense ratio has fallen to about 10% in 1997 from 15.5% in 1993. This advantage is somewhat offset by the more onerous commission structure. Commissions plus premium taxes will continue to average about 20% given AZ Canada's strategy to build an exclusive broker distribution network for each key marketing program.

-- Conservative balance sheet: Standard & Poor's capital model yields consolidated capital adequacy of 147.6% at year-end 1997. This is consistent with the parent's intention to keep its subsidiaries well capitalized. Reserves are conservative and investment risk is minimal.

-- Modest operating performance: At year-end 1997, the combined ratio was 104.9%, the corresponding return on revenue (ROR) was 2%. This was a deterioration from the 101.1% combined and the 5.3% ROR reported for 1996. Going forward, Standard & Poor's expects returns on revenue to improve to about 3%-5% as the book is further segmented.

-- Competitive market conditions: The Canadian property casualty (P&C) industry is undergoing intense price pressures. AZ Canada will have to continue seeking new client segments within the niche it has chosen. Expectations:

-- Consolidation will continue to work in AZ Canada's favor: With the upcoming potential to amalgamate the Allianz and AGF portfolios, Allianz would secure the position of 10th-largest P&C insurer in the Canadian market.

-- Sustainability of growth: Since 1995, growth has been 10%-11%. Standard & Poor's believes that this may not be sustainable given AZ Canada's position in its various niches. New niches have yet to be proven. Future premium growth is expected to be strong at about 8%-10%. This is consistent with AZ Canada's goal of exceeding market growth by about 5 points, Standard & Poor's said.---CreditWire