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Rating Action:

Moody’s affirms ratings of South African insurance groups following action on the South African sovereign and changes the outlook to negative

05 November 2019


London , November 5, 2019 – Moody's Investors Service ("Moody's") has today affirmed the Insurance Financial Strength (IFS) and related debt ratings as well as the issuer ratings of the following South African insurance groups and changed the outlooks to negative from stable:

- Discovery Limited (Discovery): Ba1 long-term Issuer rating

- Guardrisk Insurance Company Limited (Guardrisk Insurance) (and related Guardrisk entities): Baa3 Insurance Financial Strength

- Momentum Metropolitan Life Limited (MML): Baa2 Insurance Financial Strength

- Old Mutual Life Assurance Company (South Africa) Ltd, (OMLAC(SA)): Baa2 Insurance Financial Strength

- Standard Insurance Limited (SIL): Baa3 Insurance Financial Strength

In addition, Moody's has appended a (hyb) indicator to the Ba1 and Aa2.za global and national scale ratings of Momentum Metropolitan Life Limited's subordinated debt in accordance with our Rating Symbols and Definitions published in February 2019.

A full list of affected ratings is included at the end of this document.

RATINGS RATIONALE

Today's rating action follows the affirmation of the Baa3 debt rating of the Government of South Africa and change in outlook to negative from stable. Moody's decision to change the outlook to negative from stable reflects the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures. The challenges the government faces are evident in the continued deterioration in South Africa's trend in growth and public debt burden, despite ongoing policy responses. For details of Moody's rating action and change in outlook for the sovereign, please see the related press release: Moody's changes South Africa's outlook to negative from stable, affirms Baa3 ratings (https://www.moodys.com/research/--PR_412385 ).

The affirmation of the insurers' IFS ratings reflects their financial profiles, which have been resilient so far to the continued challenges in South Africa's operating environment. These insures benefit from strong capitalisation on an economic and regulatory basis, as well as good profitability supported by their established market positions in South Africa.

Moody's has changed to negative from stable the outlook on these South African insurers to reflect the linkage to the sovereign rating; in fact, Moody's considers these insurance groups' key credit fundamentals (asset quality, capitalisation, profitability and financial flexibility) to be partly correlated to -- and thus linked to -- the economic and market conditions in South Africa, where they are domiciled and have significant operations. However, Moody's also notes that the IFS ratings of OMLAC(SA) and MML remain above the sovereign rating, reflecting their solid capitalization and the flexible liability profile of some of their products. In particular, the products' flexibility offers a relatively high ability to share asset losses with policyholders by permitting OMLAC(SA) and MML the right to retract non-vested policyholder bonuses, or to utilize funds in the bonus stabilisation accounts and/or make lower future bonus declarations to policyholders. Similarly, for Discovery, we consider its notional IFS assessment for the group to be one-notch above the sovereign rating of the Government of South Africa, and it reflects our view that Discovery's diverse business mix, significant fee income and moderate asset leverage reduces the exposure to South African sovereign risk.

--- Discovery Limited: Ba1 long-term Issuer rating and Aa3.za national scale long-term Issuer rating affirmed with outlook changed to negative

Discovery's Ba1 long-term Issuer rating reflects the group's very strong franchise in South Africa and its growing global footprint, its strong profitability and significant non-insurance fee income from Discovery Health, moderate exposure to local investments because of the capital-light nature of its business, and good capitalization on both a regulatory and economic basis. These strengths are partially offset by the group's substantial business exposure to South Africa and the challenging operating environment, the potential threat that the planned introduction of National Health Insurance presents to its long-term profitability, complexity inherent in its shared value insurance model, and expansion initiatives that present execution risk and require significant amounts of external funding.

--- Guardrisk Group: Baa3 IFS rating of rated subsidiaries, affirmed with outlook changed to negative

The Baa3 global scale IFS ratings assigned to entities in the Guardrisk group - as well as the Aaa.za national scale IFS ratings assigned to the South African entities - reflect (i) its good market position as the largest cell captive insurer in the South African market, (ii) low underwriting risk due to its predominately fee based model, (iii) diverse product mix across life insurance and short-tailed non-life insurance lines, and (iv) strong profitability. These strengths are partially offset by (i) its investment portfolio's concentrated exposure to the South African economy and banking system, which is somewhat correlated with the credit risk of cell owners and (ii) modest cushion above regulatory capital requirements.

The rated entities included in the Guardrisk group, collectively referred to as Guardrisk, include Guardrisk Insurance Company Limited, Guardrisk Life Limited (Guardrisk Life) and Guardrisk International Limited PCC (Guardrisk International), incorporated in Mauritius (Government of Mauritius, Baa1 stable). Guardrisk Insurance and Guardrisk Life are rated both Baa3 on the global scale, and Aaa.za on the national scale, while Guardrisk International is rated Baa3 on the global scale only. Additionally, while Guardrisk is comprised of various regulated entities, we consider Guardrisk's various entities to be a single analytic unit, and, as such rate them at the same level, including Guardrisk International, which although it is regulated, capitalised and increasingly managed separately from the broader Guardrisk group, remains an integral part of the group and therefore the analytic unit.

--- Momentum Metropolitan Life Limited: Baa2 IFS rating affirmed, outlook changed to negative

MML's Baa2 global scale, and Aaa.za national scale, IFS ratings reflect the insurer's top tier market position in South Africa, its solid capital position and its flexible product characteristics which serve to reduce the impact on the group from stress related to credit pressures at the sovereign level. These strengths are partially offset by the group's exposure to South Africa, both in the form of its invested assets and revenues, which are susceptible to the pressure on the domestic economy, and challenges meeting profitability and strategic objectives in recent years.

Recent steps the group has taken to improve profitability have started taking effect, with Momentum Metropolitan Holdings Limited's (MMH) net income rising to R2.4 billion in 2019, from R1.4 billion in 2018. Net income had deteriorated over the prior 4 years, from a high of R3.3 billion in 2014, primarily driven by a challenging operating environment, weak investment returns, and negative experience variances and basis changes. The group has taken decisive action in response to the ongoing decline in performance, including making significant senior management changes, refocusing on the core South African business while scaling back investment in new ventures, and adopting a more conservative dividend coverage level.

MML is the primary life insurance subsidiary of MMH, a leading insurance group in South Africa, that was formed in 2010 following the merger of two long established life insurance and investment groups, Momentum and Metropolitan.

--- Old Mutual Life Assurance Company (South Africa) Ltd: Baa2 IFS rating affirmed, outlook changed to negative

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 good profitability considering the challenging operating environment. 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. OMLAC(SA) is a wholly owned subsidiary of Old Mutual Limited (OML), and the largest life insurer in South Africa. More recently OML has been engaged in a prolonged and public legal battle with its former-CEO, which we believe has had a negative impact on the group's reputation and consumed significant management and board resources.

--- Standard Insurance Limited: Baa3 global scale and Aa1.za national scale IFS ratings affirmed, outlook changed to negative

SIL's Baa3 global scale, and Aa1.za national scale, IFS ratings reflect the insurer's established market position as a mid-tier short-term insurer in the South African market, good brand recognition and credibility afforded by its affiliation with Standard Bank, strong and consistent profitability, partly due to lower acquisition costs resulting from the sales and distribution arrangement with its parent, and strong capitalization relative to regulatory capital requirements. These strengths are partially offset by its investment portfolio's concentrated exposure to the South African economy and banking system, very high gross modelled natural catastrophe exposure relative to capital, and limited product and geographic diversification, with high concentration in residential property exposure.

SIL is a wholly-owned subsidiary of the Standard Bank Group Limited (SBG, long-term Issuer rating Ba1 negative) and an affiliate of South Africa's largest bank, by assets, The Standard Bank of South Africa Limited (SBSA, long-term Deposits Baa3, negative, BCA baa3). While SIL benefits from the Standard name, and to a large extent services a subset of SBSA's customers, the rating does not incorporate any support from SBG.

WHAT COULD CHANGE THE RATINGS UP/DOWN

--- Discovery Limited

Given the negative outlook for Discovery and the Government of South Africa, there is limited upward pressure on the rating over the next 12 to 18 months.

Conversely, the following factors could lead to downward pressure on the ratings: (i) a downgrade in the rating of the South African sovereign, (ii) failure to maintain regulatory capital levels comfortably above management's minimum target level, (iii) material uncertainty about the sustainability of the fee income generated by Discovery Health, including loss of the management contract with Discovery Health Medical Scheme (DHMS), or material deterioration in expected earnings due to implementation of National Health Insurance in South Africa, (iv) sustained increase in the group's financial leverage, meaningfully beyond its 28% Financial Leverage Metric, (v) rapid growth in banking assets that decreases the group's resilience to sovereign-related stress scenarios, (vi) material weakening in the group's franchise, including evidence that casts doubt on the viability of the "Shared Value Insurance Model".

--- Guardrisk Group

Given the negative outlook for Guardrisk and the Government of South Africa, there is limited upward pressure on the rating over the next 12 to 18 months.

Conversely, the following factors could lead to downward pressure on the 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, and (iii) material weakening in the Guardrisk's franchise, including regulatory or market changes that limit the appeal of the cell captive insurance model in South Africa.

--- Momentum Metropolitan Life Limited

Given the negative outlook for MML and the Government of South Africa, there is limited upward pressure on the rating over the next 12 to 18 months.

Conversely, the following factors could lead to downward pressure on the ratings: (i) negative rating action on the South African sovereign or banking sector, (ii) failure to maintain regulatory capital, comfortably above management's minimum target level, (iii) meaningful reduction in the proportion of its flexible liability products relative to its overall non-unit linked liabilities.

--- Old Mutual Life Assurance Company (South Africa) Ltd

Given the negative outlook for OMLAC(SA) and the Government of South Africa, there is limited upward pressure on the rating over the next 12 to 18 months.

Conversely, the following factors could lead to downward pressure on the 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, (iii) meaningful reduction in the proportion of its flexible liability products relative to its overall non-unit linked liabilities.

--- Standard Insurance Limited

Given the negative outlook for SIL and the Government of South Africa, there is limited upward pressure on the rating over the next 12 to 18 months.

Conversely, Moody's noted that the following factors could lead to a downgrade of the group's ratings: (i) a downgrade of South Africa's government debt rating and/or a downgrade of the South African banks, (ii) failure to maintain regulatory capital levels comfortably above management's minimum target level , (iii) meaningful reduction in reinsurance limits and capacity, including reinstatements, relative to modeled natural catastrophe exposures, and (iv) termination of the bancassurance agreement with SBSA.

LIST OF AFFECTED RATINGS

The following ratings have been affirmed:

Issuer: Discovery Limited

…Long- term Issuer Rating at Ba1

…National scale Long- term Issuer rating at Aa3.za

Issuer: Guardrisk Insurance Company Limited

...Insurance Financial Strength Rating at Baa3

…National scale Insurance financial strength rating at Aaa.za

Issuer: Guardrisk Life Limited

...Insurance Financial Strength Rating at Baa3

…National scale Insurance financial strength rating at Aaa.za

Issuer: Guardrisk International Limited PCC

...Insurance Financial Strength Rating at Baa3

Issuer: Momentum Metropolitan Life Limited

…Insurance financial strength at Baa2

…National scale Insurance financial strength rating at Aaa.za

…Long-term Issuer rating at Baa3

…National scale Long- term Issuer rating at Aaa.za

…Subordinated debt at Ba1(hyb)

…Backed Subordinated debt at Ba1(hyb)

…National scale subordinated debt at Aa2.za(hyb)

..National scale backed subordinated debt at Aa2.za(hyb)

…Subordinated MTN program at (P)Ba1

…Backed Subordinated MTN programme at (P)Ba1

…National scale subordinated MTN program at Aa2.za

…National scale backed subordinated MTN program at Aa2.za

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

...Insurance Financial Strength Rating at Baa2

Issuer: Standard Insurance Limited

...Insurance Financial Strength Rating at Baa3

…National scale Insurance Financial Strength Rating at Aa1.za

The outlooks on all affected issuers were changed to negative from stable.

The principal methodology used in rating Old Mutual Life Assur. Co. (South Africa) Ltd, Discovery Limited, Momentum Metropolitan Life Limited and Guardrisk Life Limited was Life Insurers published in May 2018. The principal methodology used in rating Standard Insurance Limited, Guardrisk Insurance Company Limited and Guardrisk International Limited PCC was Property and Casualty Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London
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

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