Best Affirms Old Mutual Ratings

May 31, 2005

A.M. Best Co. announced that it has affirmed the financial strength rating of “A” (Excellent) and has assigned an issuer credit rating (ICR) of “a+” to South Africa’s Old Mutual Life Assurance Company (OMLAC [SA]). At the same time, Best affirmed the ICR of “a-” on the company’s U.K. operation, Old Mutual plc. as well as the ratings on the debt securities issued by OM plc. and its subsidiaries. The outlook for all ratings is stable.

“The ratings reflect OMLAC (SA)’s strong but deteriorating business profile, its good financial performance and strengthened risk-adjusted capitalisation,” said Best.

In its discussion of the company’s “Strong but deteriorating business profile,” Best indicated that OMLAC (SA) “remains the largest life insurance company in the South African market despite a second year of disappointing new business production in 2004.” New business market share is expected to stabilize at “approximately 20 percent in 2005 (compared to 22 percent in 2004 and 30 percent in 2003),” the bulletin continued. “The improved distribution capabilities—most notably in the Personal Financial Advisor segment and in bancassurance—are likely to be the main drivers for increases in retail business production. Group business is likely to increase from the 2004 low level, though growth in the segment will be impeded by OMLAC (SA)’s recent weakness in the broker market.”

Best also indicated that it believes “the company’s effort to strengthen its position in the broker segment through Masthead (Old Mutual’s independent broker initiative) will start delivering results towards the end of 2005.”

The bulletin noted: “Operating earnings improved by a strong 56 percent in 2004 based on stable technical profitability and strong investment performance as the South African investment markets rebounded during the year. New business margins stabilised at approximately 24.5 percent (compared to 24.9 percent in 2003) but are likely to decline in 2005 as the company tries to regain market share in the corporate business sector. A.M. Best believes that the growth in regular premium employee benefits business is likely to result in another year of negative cash flow in 2005.

“OMLAC (SA)’s risk-adjusted capitalisation improved significantly in 2004 as the good performance of the South African investment markets resulted in an increase in revaluation reserves while the company reduced its dividend payout. Investment counterparty risk is likely to increase due to the planned purchase of Nedcor shares in 2005.”

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