Moody’s downgrades Old Mutual
MOODY’S Investors Service has downgraded the insurance financial strength rating (IFSR) of Old Mutual Life Assurance Company (South Africa), to A3 from A1, with a negative outlook.
In addition, the senior debt rating of Old Mutual plc is downgraded to Baa2 from Baa1, also with a negative outlook, the rating agency said on Monday.
Even after this downgrade, Old Mutual remains one of the highest-rated institutions in South Africa.
Some of Old Mutual plc’s subordinated and junior subordinated debt ratings have been affirmed with a negative outlook.
The A2 IFSR of Skandia Life Assurance Company is unaffected by the rating action.
The actions follow the weakening of the South African government’s creditworthiness, as captured by Moody’s downgrade of South Africa’s government bond ratings to Baa1 from A3 on September 27, and the continued negative outlook.
"Moody’s regards Old Mutual Life Assurance Company (South Africa)’s credit quality as being partially linked to that of the South African sovereign and its economy," the agency said.
"Typically, Moody’s considers that an insurer’s key credit fundamentals (asset quality, capitalisation, profitability and financial flexibility) are correlated with the economic and market conditions in the countries where they operate."
Old Mutual Life Assurance Company (South Africa) is the main life insurance entity of Old Mutual plc, operating in South Africa.
The two-notch downgrade reflected the company’s significant exposure to South African rand-denominated assets, including sovereign debt, given the company’s largely domestically oriented investment exposure (particularly sovereign and banking assets) and its domestic underwriting focus on South Africa, Moody’s said.
Following this action, Moody’s now rates Old Mutual Life Assurance Company (South Africa) one notch higher than the South African sovereign rating.
Moody’s said the one-notch differential continued to reflect the insurer’s flexible product characteristics, which reduce the impact of stress related to the government. This mechanism offers a relatively high ability to share asset losses with policyholders by using the bonus-smoothing accounts or making negative bonus declarations to policyholders.
However, the smaller differential — it is down from two notches above the sovereign rating before — reflects Moody’s view that as the South African economic environment deteriorates, this places increasing pressure on sales opportunities and underlying earnings in the South African life market, as well as increasing the downside risk to asset values the insurer may not be able to share fully with policyholders.
The rating positioning also reflects the insurer’s very heavy domestic focus.
Moody’s said the downgrade of Old Mutual plc reflected its heavy reliance on South African earnings from Old Mutual Life Assurance Company (South Africa) and Nedbank, which together accounted for about 75% of 2011 adjusted operating profit, with the balance largely derived from the wealth management division following the 2012 sale of Skandia’s Nordic business.
Moody’s weaker view of the South African operating environment and the South African insurer’s IFSR weighed on the holding company’s credit quality, despite the group’s efforts to simplify its structure, including the sale of Skandia Nordic and its Finnish operations in 2012, and the achieved target of repaying £1.5bn of debt, Moody’s said.