OREANDA-NEWS. March 16, 2015. Fitch Ratings has assigned Old Mutual Life Assurance Company (South Africa) Limited's (OMLACSA) proposed issue of subordinated debt securities an expected rating of 'AA(zaf)(EXP)'.

The final rating is contingent on the receipt of final documents conforming to information already received.

The notes are rated two notches below OMLACSA's National Long-Term Rating of 'AAA(zaf)' to reflect their subordination and loss absorption features, in line with Fitch's notching criteria.

Concurrently, Fitch has affirmed Old Mutual's ratings. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
OMLACSA's proposed issue of subordinated notes will be issued with a 10-year, 12-year or 15-year maturity or a mixture thereof and will be callable after a period of five to 10 years. They could also be composed of both a fixed and floating coupon. The notes include a mandatory interest deferral feature which is triggered when the company's capital level falls below the regulatory capital requirement.

According to Fitch's methodology, this subordinated bond is classified as 100% capital due to regulatory override within Fitch's risk-based capital calculation and is classified as 100% debt for the agency's financial leverage calculations. Fitch expects leverage to remain low for OMLACSA's rating category and interest coverage to be strong.

The affirmation of Old Mutual's ratings reflect the group's leading position in the South African life insurance market, the strong and supportive level of risk-adjusted capitalisation, robust earnings generation and improved hard currency cover.

The ratings also 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 Old Mutual Wealth Life & Pensions Ltd (OMWLPL) 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 its leading position in South Africa, its strong capitalisation (end-2014 regulatory solvency coverage: 3.1x) relative to peers and its ability to share potential investment losses with policyholders. OMWLPL is an important contributor to the group's earnings, accounting for about a quarter of the group's operating profits, and is strongly capitalised (end-14: 2.6x).

The group's international scale IFS rating assigned to OMWLPL, 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 of bonus smoothing accounts in the smoothed bonus policies, and the financial flexibility from being listed on the London Stock Exchange.

The Stable Outlook reflects the fact that a one-notch downgrade of the South African sovereign rating would not trigger a downgrade of Old Mutual's ratings. The possibility of OMWLPL 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 5.0x in FY14 (2013: 4.2x). Cash at the holding company level remains strong at GBP1bn at end-2014 (end-2013: GBP545m). However, GBP566m of this was used in the acquisition of Quilter Cheviot.

RATING SENSITIVITIES
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 only if its creditworthiness deteriorated 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 were 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 (2014: 5.0x).

The rating on the subordinated debt securities is notched down from the issuer's rating and is therefore sensitive to changes in OMLACSA's National Long-term rating.

The rating actions are as follows:

Old Mutual PLC
Long-term IDR: affirmed at 'BBB'; Outlook Stable
Senior unsecured debt: affirmed at 'BBB-'
Subordinated debt: affirmed at 'BB'
Short-term IDR and commercial paper: affirmed at 'F3'

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 (existing): affirmed at 'AA(zaf)'
Subordinated debt (expected): assigned 'AA(zaf)(EXP)'

Old Mutual Wealth Life & Pensions Ltd
IFS rating: affirmed at 'A-'; Outlook Stable
Long-term IDR: affirmed at 'BBB+'; Outlook Stable