November 23, 2017 / 5:06 PM / in 25 days

Fitch Affirms Old Mutual Wealth at IFS 'A'/Stable

(The following statement was released by the rating agency) LONDON, November 23 (Fitch) Fitch Ratings has affirmed Old Mutual Wealth Life Assurance Limited's (OMWLA) Insurer Financial Strength (IFS) Rating at 'A', and Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlooks are Stable. KEY RATING DRIVERS OMWLA's ratings reflect the Old Mutual Wealth group's (OMW) strong business profile and very strong capitalisation and leverage. This is offset by OMW's profitability, which we view as a rating weakness. OMW is a leading UK-based retail wealth management business, with more than 900,000 customers and normalised assets under administration of GBP107 billion at end-1H17. The group's vertically integrated operating model offers a series of complimentary services through distinct financial advice, wealth management, investment platforms and retirement product businesses. These separate businesses compete in the open market with each having a top five market position in its chosen field. We believe that OMW's operating structure positions the group well to exploit a growing UK discretionary savings market. However, this strength is offset by the group's geographical concentration in the UK and limited diversification by client base. OMW focuses largely on the retail savings market. The group's UK investment platform is one of the market leaders, with GBP46 billion assets under administration at end-1H17. The group has undertaken a project to modernise this platform, expand its functionality and improve operational efficiencies. The project is due to complete in 2019, at a total cost of up to GBP160 million over three years. Fitch believes that any material delays or cost-overruns pose a risk to OMW's ability to compete successfully in the low-margin investment platform market. OMW has indicated that it is reviewing its ownership of the Old Mutual Global Investors Single Strategy business unit (OMGISS). This process could lead to a disposal of OMGISS. Such a transaction would meaningfully reduce both OMW's revenue diversification and return on capital. OMGISS's client base is largely (80%) made up of institutional investors and in 1H17 contributed 27% of operating profit to OMW. This business unit recorded a strong 33% CAGR in assets under management since 2015. Currently OMW holds no external debt and maintains a high level of capitalisation. OMW reported a group Solvency II ratio of 177% at end-1H17. Fitch views this strong ratio as consistent with the low balance sheet risk of OMW relative to its UK peers. The rating is not sensitive to a moderate increase in leverage as capitalisation is already very strong. OMW reported a net profit of GBP42 million in 1H17, a significant improvement from a GBP23 million net loss in 1H16. This was driven by growth in revenue and performance fees, as well as a GBP24 million profit on the disposal of Old Mutual Wealth Italy. OMW has recorded an average net income return on equity (ROE) of 0.5% over the past four years, significantly below the four-year average adjusted operating profit (AOP) ROE of 10%. The main differences between the two measures reflect costs associated with the platform transformation project, goodwill impairment and the amortisation of acquired value of in-force business (AVIF) and intangibles. In 1H17 net profit included GBP59 million of platform transformation programme costs that are likely to weigh on profitability in 2017 and 2018. We view further operational difficulties in deploying its new investment platform as a key risk to future earnings recovery. However, Fitch expects OMW's normalised net income ROE, i.e. ROE adjusted for amortisation of AVIF and intangibles, to exceed 4% in 2018. OMW's financial flexibility as a standalone group is untested. However, it does not hold any external debt, although we do expect the group to assume moderate financial leverage in the medium term. RATING SENSITIVITIES OMW may be downgraded if normalised net income ROE falls to below 4%. An improvement in OMW's profitability, as measured by normalised net income ROE above 10% on a sustained basis, could lead to an upgrade. Contact: Primary Analyst Willem Loots Senior Director +44 20 3530 1808 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Harish Gohil Managing Director +44 20 3530 1257 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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