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Rating Action:

Moody's affirms Old Mutual's ratings following separation of key subsidiaries; Outlook for OM Wealth Life Assurance changed to stable from negative

04 Jul 2018

London, 04 July 2018 -- Moody's Investors Service, ("Moody's") has today affirmed the Ba1 Long-Term Issuer and Ba2(hyb) Subordinate debt ratings of Old Mutual Plc, and the Baa2 Insurance Financial Strength (IFS) rating of Old Mutual Life Assurance Company (South Africa) Limited. (OMLAC(SA)), with stable outlook. In the same action, Moody's affirmed the A2 IFS rating of Old Mutual Wealth Life Assurance Limited (OMWLAL), Quilter Plc's life insurance subsidiary, and changed the outlook to stable from negative.

These actions follow the initial public offerings (IPO), last week, of two operations: (i) Quilter Plc, formerly Old Mutual Wealth, and (ii) Old Mutual Limited (OML), a new South African holding company for OMLAC(SA), Nedbank Limited and the group's other African and emerging markets businesses. These two IPOs are in line with Old Mutual's strategy of managed separation, initiated in 2016, by which the group would be separated into four individual businesses. Concurrently Old Mutual Plc, formerly the group holding company, became a subsidiary of OML. During the remainder of 2018, OML will reduce its stake in Nedbank to 19.9% from the current 52%, substantially completing the managed separation.

A full list of ratings impacted by action are included at the end of this document.

RATINGS RATIONALE

OLD MUTUAL PLC

The affirmation of Old Mutual Plc's (OM Plc) ratings at their current levels reflects that OM Plc, currently a subsidiary of OML, remains a part of the OML group and therefore affiliated with OMLAC(SA), the key operating entity of the group, and anchor point for OM Plc's debt ratings. While still part of the group, OM Plc is no longer the owner of the group's principal operating entities, including OMLAC(SA), and therefore does not have access to operating cash flows with which to service its liabilities. However, as a condition for approval of the separation and restructure of the group, the Board has provided the UK Court with an undertaking that it would hold high quality liquid assets in excess of its liabilities plus a 10% buffer. On a quarterly basis, starting from 1 October 2018, the Board of Old Mutual Plc will be permitted to deal with any surplus assets over the 110% as it sees fit. This undertaking to hold high quality assets in excess of liabilities provides a high degree of assurance about OM Plc's ability to service its debt, despite not having access to operating cash flows.

The stable outlook for Old Mutual Plc reflects the stable outlook for OMLAC(SA), and our understanding that the company will continue to hold high quality assets in excess of its liabilities, supporting its ability to service and ultimately redeem its outstanding debt.

OLD MUTUAL LIFE ASSURANCE COMPANY (SOUTH AFRICA) LIMITED

OMLAC(SA)'s Baa2 IFS rating reflects the company's very well established and strong market position in South Africa, its solid capitalization relative to economic and regulatory capital requirements, the flexible liability profile of some of its products, that allows it to share investment losses with policyholders, and its extensive distribution capabilities in the local market. These strengths are partly offset by the company's dependence on the highly competitive South African life insurance market, its material exposure to South Africa -- in terms of both invested assets and earnings -- which constrains the company's credit profile, and still subdued economic conditions in South Africa, that could depress earnings over the short to medium-term.

The Baa2 IFS rating for OMLAC(SA) is one-notch above the sovereign rating of the Government of South Africa (Baa3, stable) and reflects our view that its solid capitalization and the flexible liability profile of some of its products limits its exposure to possible stress at the sovereign level. However OMLAC(SA)'s ratings are constrained by the sovereign credit environment, due to linkages as a result of (i) invested assets (government, banking or other securities) and (ii) correlation of operating performance to the local economy.

The stable outlook for OMLAC(SA) reflects the stable outlook on the South African sovereign, and the linkage between OMLAC(SA) and South Africa.

OLD MUTUAL WEALTH LIFE ASSURANCE LIMITED

The change of outlook for OMWLAL to stable from negative reflects the improving operating metrics, together with moderation of the risk related to the platform transformation project and its strong balance sheet.

OMWLAL's A2 IFS rating, which is based on our assessment of the entire Quilter Plc (formerly, Old Mutual Wealth), reflects (i) its strong market position in the advised retail and private wealth management sectors and progress the group has made in improving net flows and Assets under Administration and Management (AuAM) over the past three years, (ii) its low product risk profile given the predominance of unit-linked and asset management business, (iii) strong capitalization and balanced capital structure, and (iv) reduced execution risk, both with respect to its platform transformation project, and its ability to operate as a separate listed entity, after separation from OM Plc.

Favourable sector dynamics and growth in Quilter's distribution network have driven an increase in non-Heritage net client cash flows (NCCF), which increased to GBP7.6 billion in 2017, up from GBP4.3 billion in 2015. Similarly, total revenue increased to GBP728 million for 2017, from GBP587 million in 2015. While flow and revenue metrics has improved meaningfully, this has been partially offset by lower operating margins as a result of pressure on fee income and increased costs related to Quilter's investment in its distribution network and platform transformation. While flow and revenue metrics have improved, operating margins decreased to 29% in 2017, from 32% in 2016 and 36% in 2015, with Quilter targeting an operating margin of 30% from 2020 onwards. Despite softer operating margins, absolute operating profit has remained relatively steady at GBP209 million in 2017 (2016: GBP208 million, 2015: GBP213 million), due to the aforementioned growth in volumes.

Capitalisation is strong with Solvency II coverage for OMWLAL and Quilter of 146% and 171% (pro-forma) respectively, at year-end 2017, supported by the group's post-IPO capital structure and moderate debt level, with financial leverage of approximately 10% on a pro-forma business.

These strengths are partially offset by the group's relatively narrow focus on the UK retail-adviser sector of the wealth market and its concentrated exposure to the UK. In addition, while its platform transformation project has been significantly de-risked following shifting the contract to a more established vendor with a strong UK track record, the project remains a complex undertaking with a number of potential obstacles ahead of completion, expected during 2019.

WHAT COULD CHANGE THE RATINGS UP OR DOWN

OLD MUTUAL PLC

There is limited upward pressure on OM Plc's ratings given that the company will gradually wind down operations. However, the company's ratings are anchored on OMLAC(SA)'s IFS rating, and could face upward or downward pressure in line with OMLAC(SA). In addition, OM Plc's ratings would likely be downgraded on indication of the group's undertaking to hold high quality assets in excess of liabilities not being upheld.

OLD MUTUAL LIFE ASSURANCE COMPANY (SOUTH AFRICA) LIMITED

Moody's noted that the following factors could lead to upward pressure on OMLAC(SA)'s ratings: (i) an upgrade of the rating of the South African sovereign, and (ii) diversification of the group's geographic footprint as concerns its invested assets and earnings that meaningfully reduces is exposure to South Africa, or other highly correlated regions. Conversely, Moody's noted that the following factors could lead to downward pressure on OMLAC(SA)'s ratings: (i) negative rating action on the South African sovereign or banking sector, (ii) failure to maintain regulatory capital levels comfortably above management's minimum target level, and (iii) meaningful reduction in the proportion of its flexible liability products relative to its overall non-unit linked liabilities.

OLD MUTUAL WEALTH LIFE ASSURANCE LIMITED

Moody's noted the following factors that could lead to upward pressure on our assessment of Quilter Plc's credit profile, and therefore OMWLAL: (i) increased scale, in terms of fee income and AuAM relative to larger peers, with revenue of around $1.5 billion, (ii) increased diversification in terms of product offering, distribution channels or geographic presence, and (iii) meaningful increase in both operating profit and IFRS net income on a sustained basis, with Moody's Pre-tax Income Margin in excess of 20%. Conversely, Moody's noted the following items that could cause downward pressure on OMWLAL's rating: (i) deterioration in operating metrics, including AuAM, net flows and operating margins, with revenue trending below $750 million, (ii) meaningful increase in debt leverage and/or weakening in regulatory capital levels, with Debt-to-EBITDA in excess of 2x, (iii) significant deterioration in franchise strength and market position, including weakening of distribution capabilities, and (iv) additional meaningful setbacks in the group's platform transformation project.

LIST OF AFFECTED RATINGS

The following ratings have been affirmed:

Issuer: Old Mutual Plc

Long term Issuer rating at Ba1

Senior Unsecured MTN program at (P)Ba1

Subordinate MTN program at (P)Ba2

Subordinated debt at Ba2(hyb)

Other Short Term at (P)NP

Commercial Paper at NP

Outlook remains stable

Issuer: Old Mutual Life Assurance Company (South Africa) Limited

Insurance Financial Strength at Baa2

Outlook remains stable

Issuer: Old Mutual Wealth Life Assurance Limited

Insurance Financial Strength at A2

Outlook changed to stable from negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Brandan Holmes
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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