NEW YORK--(Business Wire)--
Fitch Ratings has downgraded the following ratings of OM Financial
Life Insurance Company (OM Financial) and its wholly owned subsidiary
OM Financial Life Insurance Company of NY (OM Financial of NY),
collectively referred to as Old Mutual Financial Network (OMFN):
OM Financial
OM Financial of NY
--Insurer financial strength (IFS) rating to 'BBB+' from 'A-'.
The Rating Outlook is Stable.
Today's rating action is based on Fitch's expectation that the
continued poor earnings performance of the Old Mutual plc's (Old
Mutual) U.S. Life operations - which includes OMFN as well as its
Bermuda operations - could call into question Old Mutual's long-term
commitment to this business.
The most important factor in OMFN's IFS ratings continues to be
the financial strength and support of Old Mutual. Old Mutual has
provided capital support, management expertise, centralized services
and reinsurance relationships. Without such parental support, OMFN's
ratings would be lower than the current rating category. In accordance
with Fitch's group rating methodology, at this time Fitch still
considers OMFN as a very important part of Old Mutual's overall
strategy. However, given Fitch's view that Old Mutual's long-term
commitment to the U.S. Life business could be weakened, the uplift in
the U.S. insurance companies' ratings has narrowed by one notch.
Fitch's rating action follows the recent report of Old Mutual's
interim results for the first half of the year. The results included
an investment impairment of $149 million pretax primarily relating
either directly or indirectly to subprime residential mortgage-backed
securities (RMBS) and a reserve strengthening in its Bermuda variable
annuity (VA) business of $212 million pretax. Neither of these charges
are viewed as material to Old Mutual. However, both signify additional
weakness in the U.S. Life operations that Fitch was not anticipating.
Fitch expects that the impairment charge, which predominately
relates to OMFN's investment portfolio, will drive a statutory net
loss for the first half of 2008. Fitch believes this will have an
impact on the company's capital position, which is at a level below
the rating category (Fitch's 2006 Prism score for OMFN was 'BB' and OM
Financial's operating leverage was 28x at March 31, 2008). If the
economic and credit environments do not improve and investment
impairments persist in the second half of the year, Fitch believes -
depending on the severity - OMFN will be hardpressed to employ various
capital management levers to maintain a 300% risk based capital (RBC)
without a capital infusion from Old Mutual. Fitch's expectation is
that Old Mutual will continue to provide the capital necessary to
support the U.S. Life operations over the near term.
OMFN's remaining exposure to direct subprime is about $720 million
and $600 million in monoline insurer exposure on a $20 billion
portfolio. It should be noted that 99% of the remaining subprime
exposure remains above an 'AA' rating and 89% of the monoline is
indirect (wrapped) exposure.
The VA charge was taken on Old Mutual's Bermuda operations. It was
primarily related to ineffective hedges on certain minimum return
guarantees, particularly as they related to the Asian markets which
were extremely volatile in the second quarter. The company has ceased
offering the guarantee riders on all of its products (not just in the
Asian market) until it completes a thorough review of the overall
effectiveness of its hedging program.
Fitch views positively the changes Old Mutual has made in response
to the disruption in the Bermuda business with regard to its risk
management oversight in the U.S., which encompasses all products, not
just the VA business. As part of these actions, Old Mutual has
assigned its Group Finance Director and Group Head of Risk to review
all aspects of the U.S. Life business. Additionally, it appointed
Bruce Parker as CEO of the U.S. Life operations, has asked the COO to
leave, and assign Don Hope, formerly the Group Treasurer to run the
Bermuda business.
Old Mutual U.S. Life Holdings (Old Mutual U.S.) is the holding
company for OMFN. Old Mutual U.S. is a wholly owned subsidiary of its
ultimate parent, U.K.-based Old Mutual plc.
OMFN focuses on manufacturing annuity and life insurance products
for brokers, independent agents and institutional distributors. Its
target market is middle-market consumers saving for retirement or
seeking protection-oriented products. OM Financial is Old Mutual's
largest U.S. life insurance entity and along with its affiliate, forms
the cornerstone of OMFN's strategy. OM Financial has admitted assets
of approximately $18 billion and total adjusted capital of
approximately $700 million at March 31, 2008. OMFN is headquartered in
Maryland.
Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site at all times. Fitch's code of conduct, confidentiality, conflicts
of interest, affiliate firewall, compliance and other relevant
policies and procedures are also available from the 'Code of Conduct'
section of this site.
Fitch Ratings
Lauren Kalinowski, CPA, +1-212-908-0524 (New York)
Bruce E. Cox, +1-312-606-2316 (Chicago)
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
Copyright Business Wire 2008
