Credit Rating by Moody's
Old Mutual PLC
6 November 2000
Old Mutual plc and OMLAC(SA) Limited awarded credit
rating by Moody's
Moody's has issued the following announcements to the
London Stock Exchange this morning:
Julian Roberts, Group Finance Director, commented:
'We are clearly delighted that following Moody's thorough
analysis of the Old Mutual, the Group has been awarded
with these very satisfactory credit ratings for our debt
as an international group and also an insurance rating
for our principal operation Old Mutual Life Assurance
Company of South Africa.'
ENQUIRIES:
Old Mutual London Tel: + 44 20 7569 0100
James Poole, Director Investor Relations
College Hill London Tel: + 44 20 7457 2020
Gareth David
Old Mutual Cape Town Tel: + 27 21 509 2732
Bruce Allen, Manager, Group Media Communications
College Hill Johannesburg Tel: + 27 11 447 3030
Kim Milnes
Moody's press release - For publication on 6 November
2000
MOODY'S ASSIGNS AN A2 SENIOR UNSECURED ISSUER RATING TO
OLD MUTUAL PLC
First-time rating
London, 6 November 2000 - Moody's Investors Service
assigned today an A2 senior unsecured issuer rating to
Old Mutual plc. The rating outlook is stable. The issuer
rating covers senior financial obligations of Old Mutual
plc. Specific debt securities are considered unrated as
the issuer rating does not take account of differences
between indentures. The rating is a first-time rating
assigned to the company by Moody's.
In a press release published simultaneously, Moody's also
announced the assignment of a Aa3 domestic currency
insurance financial strength rating to Old Mutual Life
Assurance Company (South Africa) Ltd. ('OMLAC (SA)
Ltd.'), the group's South African life assurance
subsidiary. The Aa3 rating is applicable to the company's
domestic Rand-denominated policyholder liabilities, and
is assigned on a global scale. It is the first rating
assigned by Moody's to a South African insurance company.
Moody's said that its rating assignment, four notches
above the Baa3 South African foreign currency ceiling, is
based on two conclusions. The first one is that Old
Mutual's joint UK and US operations should, on their own,
be able to generate sufficient cash-flows to service the
debt issued by Old Mutual plc with an adequate interest
coverage ratio. In that respect, any potential non-
convertibility of the Rand would not by itself lead to a
default of Old Mutual plc.
The second conclusion is that the currency risk on South
Africa and the business risks on the group's US and UK
operations are unrelated. To the extent that both South
African and UK/US operations are able to service the debt
on their own, Moody's believes that the A2 debt rating
adequately reflects the likelihood of a default of Old
Mutual plc.
Ultimately, the rating takes account of: (i) the risk of
a joint inability of Old Mutual's South African and US/UK
operations to service the debt; (ii) the macro-economic
and, more generally, the operating environment in the
countries in which Old Mutual does business; (iii) the
fact that most of the group's net asset value is in South
Africa; (iv) the possibility of a further weakening of
the Rand; and (v) the potential constraints the group
faces in upstreaming to the UK the proceeds of asset
disposals within South Africa.
The stable outlook reflects Moody's expectation that an
upgrade of South Africa's current foreign currency
ceiling to Baa2 from its current level of Baa3 (positive
outlook) may not - with everything else being equal -
have a sufficient impact to justify an upgrade of Old
Mutual plc.
RATING METHODOLOGY
Moody's rating methodology for Old Mutual plc involved:
(1) an analysis of the group's overall strategy and
financial fundamentals; (2) a detailed review of the
group's operations in southern Africa, the UK and the US;
and (3) a review of foreign currency issues, as the
group's earnings originate from several countries with
different currencies.
The rating agency recognised the fairly unique structure
of the group and tailored its approach to ensure that its
analysis would reflect the risk borne effectively by Old
Mutual plc's debtholders. As a result, both the A2 debt
rating on Old Mutual plc and the Aa3 domestic currency
insurance financial strength rating on OMLAC (SA) Ltd.
are comparable to Moody's ratings assigned world-wide.
Moody's noted that Old Mutual plc, as a UK-based company,
was not directly constrained by the foreign currency
ceiling of South Africa. This foreign currency ceiling is
an opinion on the risk associated with exchange controls
which could disrupt the timely repayment of debt
securities. For Old Mutual, it is the risk that the
group's South African subsidiaries will be unable to
upstream cash-flows to their parent company in the UK.
Judging by the experience of other countries, Moody's
believes that this may typically be a two-year event.
GROUP OVERVIEW
Based in the United Kingdom, Old Mutual plc is the
ultimate holding company of a diversified group operating
mainly in the fields of life assurance, asset management,
banking, non-life ('short-term') insurance and other
financial services. The group operates with subsidiaries
based principally in the UK, US and South Africa, . The
company was created in 1999 following the demutualisation
of The South African Mutual Life Assurance Society, the
former mutual whose business was assumed by OMLAC (SA)
Ltd. The company has a primary listing in London.
Old Mutual's overall strategy is to develop a world-wide
platform in the area of life assurance and asset
management whilst strengthening its existing operations
in Southern Africa. The overall risk profile of the
group's operations is fairly low as life assurance and
asset management operations should typically deliver good
sustainable returns with limited volatility.
Moody's also believes that the group's other operations
in banking and non-life ('short-term') insurance are well
managed and have an overall low risk profile in the South
African context. The group's self-assigned hurdle rates
are high, which should help create value out of
acquisitions, but may also make it more difficult to find
the right acquisition opportunities.
Starting from an un-leveraged balance sheet in December
1999, Old Mutual plc raised debt in 2000 to finance
acquisitions in the UK and in the US. Moody's notes that
interest coverage is comfortable on the basis of
sustainable earnings. In particular, each of Old Mutual's
core operations is expected to deliver good cash-flows
going forward. Moody's understands that it is not the
company's strategy to raise debt at the level of Old
Mutual plc to pay for acquisitions in Southern Africa.
REVIEW OF INDIVIDUAL OPERATIONS
Looking at the group's individual operations, Moody's
commented that OMLAC (SA) Ltd. is, in the rating agency's
opinion, one of Old Mutual's strongest operations. OMLAC
(SA) Ltd. benefits from a very strong and resilient
franchise in South Africa; a diversified, low-risk
product mix; a genuine multi-distribution capability; and
the strong expertise of its management teams, for
instance in the areas of product development, information
technology and for the actuarial and asset management
functions. The company has maintained its leading market
position for a number of years, and enjoys one of the
strongest brands in the South African market. A key
credit factor has also been the excellent financial
flexibility enjoyed by the company, as policies do not
include guaranteed surrender values and a portion of
policyholder bonuses are typically not guaranteed.
Other main South African operations include Nedcor and
Mutual & Federal, in which Old Mutual has majority
ownership. Nedcor is the fourth largest South African
banking group (Nedcor Bank, C bank financial strength;
Ba1 bank deposits rating constrained by the country
ceiling). It enjoys high efficiency levels, a solid
information technology platform, and demanding return
objectives set by management. Mutual & Federal has a
market leading position in the field of non-life ('short-
term') insurance, and benefits from a high solvency
level. It has made an underwriting profit over the recent
years, although the recent deterioration of market
conditions made it more difficult to attain this high
objective in 1999.
In the UK, Old Mutual expanded in the last few years with
various acquisitions which culminated with the take-over
bid made for the Gerrard Group in March 2000. According
to Moody's, Old Mutual does not have in the UK the
franchise strength it enjoys in South Africa. Its niche
operations, in the fields mainly of private asset
management and derivative/equity brokerage, are subject
to intense competition. Moody's notes, in particular,
that a lot of work is required to build the Gerrard brand
and grow the business further. However, the rating agency
said that Old Mutual should receive recurring earnings
from its UK operations with limited downside risk, which
has been seen as a positive in the context of the debt
rating.
Finally, Old Mutual announced in June 2000 the
acquisition of United Asset Management ('UAM'), a US
asset management firm with around US$200 billion of
assets under management. With a unique structure
consisting of some 41 independent affiliated asset
managers, UAM is one of the largest US asset managers. It
suffered in the recent past from disappointing investment
performance and negative net client cash flows due mainly
to the focus of the company on the slower growing defined-
benefit products in the U.S. and out of favour value
oriented funds, a lack of brand identity, and inadequate
management incentive plans.
Going forward, UAM plans to focus its efforts around a
selected, high profile, group of affiliated firms, and to
re-incentivise management. Moody's notices that turning
the business around may prove challenging, and that there
is execution risk in the process. Nevertheless, the
company's strong client base, the comparatively low price
paid for UAM by Old Mutual and the strong cash-flow
generation capability of the asset manager should make it
possible the improve the operating performance of Old
Mutual.
Based in London, United Kingdom, Old Mutual plc had total
consolidated assets of 58 billion British Pounds (600
billion Rand ) as of June 2000, excluding UAM. On a
proforma basis and inclusive of UAM, total assets under
management amounted to US$275 billion as of June 2000.
London
Mark Hewlett
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454
London
Damien Regent
Assistant Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454
Moody's press release - For publication on 6 November
2000
MOODY'S ASSIGNS A Aa3 DOMESTIC CURRENCY INSURANCE
FINANCIAL STRENGTH RATING TO OLD MUTUAL LIFE ASSURANCE
COMPANY (SOUTH AFRICA) LTD.
First rating assigned to a South African insurance
company
London, 6 November 2000 - Moody's Investors Service
assigned today a Aa3 domestic currency insurance
financial strength rating to Old Mutual Life Assurance
Company (South Africa) Ltd. ('OMLAC (SA) Ltd.'). The
rating outlook is stable. The rating expresses Moody's
opinion on the company's ability to repay punctually
senior policyholder claims and obligations. It is
applicable only to the company's domestic Rand-
denominated policyholder liabilities.
The Aa3 rating is assigned on a global rating scale, and
as a result is comparable to Moody's ratings world-wide.
This is the first time Moody's has rated a South African
insurance company. Life insurance financial strength
ratings have already been assigned by Moody's to
companies in 10 countries globally.
In a press release published simultaneously, the rating
agency also announced the assignment of an A2 senior
unsecured issuer rating to Old Mutual plc, OMLAC (SA)
Ltd.'s ultimate parent company based in the United
Kingdom.
Commenting on its rating methodology, Moody's said that
its analysis involved: (i) a review of the company's own
strategy, franchise and financial fundamentals; (ii) a
detailed analysis of Old Mutual's overall strategy and
financial profile at the group level; and (iii) a review
of the operating environment and country-specific risks.
Based in Cape Town, South Africa, OMLAC (SA) Ltd. is Old
Mutual's fully-owned South African life assurance
subsidiary and the group's largest operation in the
country by asset size. The company incorporated the
business of The South African Mutual Life Assurance
Society, the former mutual which demutualised in 1999.
Moody's commented that, on its own, OMLAC (SA) Ltd. has
considerable strengths in its domestic market. The
company has a very strong and resilient franchise, as
illustrated by its market share maintained over the years
above 25%. It has a very-well known brand in Southern
Africa which has been built over a number years. The
expertise of its management teams, whether in product
development, information technology and
actuarial/financial functions, among others, is very
strong by international standards. The company also
benefits from the group's leading market position in the
South African asset management industry. Going forward,
however, the company will need to capture a client base
of low to middle-income earners as and when this market
grows, and confirm that it can maintain its leading
position.
The rating agency further said that the company has very
solid financial fundamentals, among which are: a
liability profile with few guarantees and options,
meaning that the company is very resilient to potential
shocks in capital markets; strong earnings and good
expense management; and solid capitalisation. The company
has most of its investments in equities, which can be
volatile. However, investment risk is often borne by
policyholders, although indirectly, as surrender values
are not guaranteed and unvested bonuses can typically be
clawed back.
HIV risks are well-understood and managed, and are seen
by the rating agency as unlikely to pose a serious threat
to the company's financial fundamentals. The company's
ability to re-price products, in particular, and its
strong understanding of the prevalence of the disease
considerably reduce the risk of any impact on financial
strength.
Commenting on its analysis of the Old Mutual group,
Moody's said that the assignment of a Aa3 rating was
adequate with respect to the overall risk profile of the
Old Mutual group. In particular, the debt raised at group
level remains moderate compared with the group's earnings
capacity. The risk profile of the group's operations is
fairly low, as Old Mutual is focused on low-volatility
life insurance and fund management operations. Further,
the group's acquisition strategy is seen as cautious, as
illustrated by the demanding profitability targets Old
Mutual assigns to itself when looking at acquisition
opportunities.
Moody's said that the assignment of the Aa3 rating also
took into account the rating agency's local currency
guidelines for domestic liabilities. Such guidelines,
currently at the level of Aa3 for South Africa, indicate
the highest rating level that might be assigned to the
financially strongest companies in the country. The South
African guideline assesses the general country-level
risks that need to be incorporated into the ratings of
companies for their liabilities in Rand.
Moody's believes that, as for any other South African
company, OMLAC (SA) Ltd. is exposed to some long-term
risks, among which are the risk of low economic growth,
potential social instability, the implications of high
unemployment for the country as well as the long-term
social implications of HIV.
The rating agency said that the very strong franchise of
OMLAC (SA) Ltd.; its very solid financial fundamentals;
and its soft liability profile have been critical to
attain the level of the guideline, and rate OMLAC (SA)
Ltd. at the Aa3 level. Moody's said, in particular, that
the ability for the company to adjust its liabilities to
market conditions was a considerable strength compared
with typical debt issuers.
Based in Cape Town, South Africa, Old Mutual Life
Assurance Company (South Africa) Ltd. had 1999 total
assets of 227 billion Rand, equivalent to around 20
billion British Pounds at current exchange rates. It had
1999 net premium income of 30 billion Rand.
London
Mark Hewlett
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454
London
Damien Regent
Assistant Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454
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