Fitch Downgrades OM Financial Life Ins Co's IFS to 'BBB+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the following ratings of OM Financial Life Insurance Company (OM Financial) and its wholly owned subsidiary OM Financial Life Insurance Company of NY (OM Financial of NY), collectively referred to as Old Mutual Financial Network (OMFN):

OM Financial

OM Financial of NY

--Insurer financial strength (IFS) rating to 'BBB+' from 'A-'.

The Rating Outlook is Stable.

Today's rating action is based on Fitch's expectation that the continued poor earnings performance of the Old Mutual plc's (Old Mutual) U.S. Life operations - which includes OMFN as well as its Bermuda operations - could call into question Old Mutual's long-term commitment to this business.

The most important factor in OMFN's IFS ratings continues to be the financial strength and support of Old Mutual. Old Mutual has provided capital support, management expertise, centralized services and reinsurance relationships. Without such parental support, OMFN's ratings would be lower than the current rating category. In accordance with Fitch's group rating methodology, at this time Fitch still considers OMFN as a very important part of Old Mutual's overall strategy. However, given Fitch's view that Old Mutual's long-term commitment to the U.S. Life business could be weakened, the uplift in the U.S. insurance companies' ratings has narrowed by one notch.

Fitch's rating action follows the recent report of Old Mutual's interim results for the first half of the year. The results included an investment impairment of $149 million pretax primarily relating either directly or indirectly to subprime residential mortgage-backed securities (RMBS) and a reserve strengthening in its Bermuda variable annuity (VA) business of $212 million pretax. Neither of these charges are viewed as material to Old Mutual. However, both signify additional weakness in the U.S. Life operations that Fitch was not anticipating.

Fitch expects that the impairment charge, which predominately relates to OMFN's investment portfolio, will drive a statutory net loss for the first half of 2008. Fitch believes this will have an impact on the company's capital position, which is at a level below the rating category (Fitch's 2006 Prism score for OMFN was 'BB' and OM Financial's operating leverage was 28x at March 31, 2008). If the economic and credit environments do not improve and investment impairments persist in the second half of the year, Fitch believes - depending on the severity - OMFN will be hardpressed to employ various capital management levers to maintain a 300% risk based capital (RBC) without a capital infusion from Old Mutual. Fitch's expectation is that Old Mutual will continue to provide the capital necessary to support the U.S. Life operations over the near term.

OMFN's remaining exposure to direct subprime is about $720 million and $600 million in monoline insurer exposure on a $20 billion portfolio. It should be noted that 99% of the remaining subprime exposure remains above an 'AA' rating and 89% of the monoline is indirect (wrapped) exposure.

The VA charge was taken on Old Mutual's Bermuda operations. It was primarily related to ineffective hedges on certain minimum return guarantees, particularly as they related to the Asian markets which were extremely volatile in the second quarter. The company has ceased offering the guarantee riders on all of its products (not just in the Asian market) until it completes a thorough review of the overall effectiveness of its hedging program.

Fitch views positively the changes Old Mutual has made in response to the disruption in the Bermuda business with regard to its risk management oversight in the U.S., which encompasses all products, not just the VA business. As part of these actions, Old Mutual has assigned its Group Finance Director and Group Head of Risk to review all aspects of the U.S. Life business. Additionally, it appointed Bruce Parker as CEO of the U.S. Life operations, has asked the COO to leave, and assign Don Hope, formerly the Group Treasurer to run the Bermuda business.

Old Mutual U.S. Life Holdings (Old Mutual U.S.) is the holding company for OMFN. Old Mutual U.S. is a wholly owned subsidiary of its ultimate parent, U.K.-based Old Mutual plc.

OMFN focuses on manufacturing annuity and life insurance products for brokers, independent agents and institutional distributors. Its target market is middle-market consumers saving for retirement or seeking protection-oriented products. OM Financial is Old Mutual's largest U.S. life insurance entity and along with its affiliate, forms the cornerstone of OMFN's strategy. OM Financial has admitted assets of approximately $18 billion and total adjusted capital of approximately $700 million at March 31, 2008. OMFN is headquartered in Maryland.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.