Fitch Upgrades Old Mutual's IDR to 'BBB+'; Outlook Stable
Old Mutual Life Assurance Company's (South Africa) (OMLACSA) National Insurer Financial Strength Rating (IFS) is affirmed at 'AAA(zaf)' and Old Mutual Wealth Life Assurance Company Limited's (OMW) IFS is affirmed at 'A-'.
The upgrade of Old Mutual's IDR reflects the application of Fitch's updated criteria relating to the sovereign constraint. Fitch recently updated its notching criteria for the insurance sector, published on 14 July 2015, following the publication of an exposure draft of the criteria on 12 May 2015. The updated notching criteria appear in Section VI of the insurance master criteria report 'Insurance Rating Methodology'.
Concurrently, Old Mutual's senior and subordinated notes issued by the holding company are upgraded in line with the change in the IDR. A full list of rating actions is available at the end of this commentary.
KEY RATING DRIVERS
The ratings reflect Old Mutual's position as the market-leading life insurer and largest fund manager in South Africa, and its significant presence in the UK savings market. The group also has non-life operations in South Africa through Mutual & Federal, and an asset management business in the US.
In 2014, 64% of Old Mutual's operating earnings came from South Africa, with the remainder largely from the UK. Fitch views OMLACSA and OMW as "Core" to the group under its insurance group rating methodology and therefore rates them based on the credit quality of the group as a whole.
OMLACSA's national scale ratings reflect the insurer's leading position in South Africa, its strong capitalisation (end-1H15 regulatory solvency coverage: 3.0x) relative to peers and its ability to share potential investment losses with policyholders. OMW is an important contributor to the group's earnings and is strongly capitalised (end-1H15: 2.4x regulatory coverage).
The group's international scale IFS rating is one notch higher than the South African local currency sovereign rating, owing to Old Mutual's geographical diversification: a sizeable proportion of earnings are generated in the UK and Europe. The rating also reflects the loss-absorbing feature in bonus-smoothing policies, and the financial flexibility from being listed on the London Stock Exchange.
The Stable Outlook on Old Mutual's and OMW's ratings reflect that a one-notch downgrade of the South African sovereign rating (BBB+/Negative) would not trigger a downgrade of these ratings. The possibility of OMW resources being called upon to support the South African operations is remote, in Fitch's opinion. Old Mutual's hard-currency interest cover improved further to 5.5x in 1H15 (2014: 4.3x). Cash at the holding company level remains strong at GBP550m at end-1H15 (end-2014: GBP1bn; end-1H14: GBP466m). The decline in cash between end-2014 and 1H15 was mainly due to the acquisition of Quilter Cheviot for GBP566m.
The ratings are unlikely to be upgraded as they are constrained by the South African sovereign ratings, which have a Negative Outlook.
OMLACSA's National ratings would be downgraded if its creditworthiness deteriorates materially relative to the South African sovereign and its peers in the South African market.
Old Mutual's international-scale ratings could be downgraded if there is a material reduction in the geographical diversification of earnings or a deterioration in the quality of non-South African earnings, with hard-currency cover falling below 2x.
FULL LIST OF RATING ACTIONS
Old Mutual plc
Long-term IDR: upgraded to 'BBB+' from 'BBB'; Outlook Stable
Senior unsecured debt: upgraded to 'BBB' from 'BBB-'
Subordinated debt: upgraded to 'BB+' from 'BB'
Short-term IDR and commercial paper: upgraded to 'F2'
Old Mutual Life Assurance Company (South Africa) Limited
National IFS rating: affirmed at 'AAA(zaf)'; Outlook Stable
National Long-term rating: affirmed at 'AAA(zaf)'; Outlook Stable
Subordinated debt: affirmed at 'AA(zaf)'
Old Mutual Wealth Life Assurance Limited
IFS rating: affirmed at 'A-'; Outlook Stable
Long-term IDR: upgraded to 'A-' from 'BBB+'; Outlook Stable.