I-Net Bridge
The A1 Insurance Financial Strength Rating (IFSR) of Old Mutual Life Assurance Company (South Africa) (OMLACSA) reflects the company's very strong and resilient franchise maintained over many years.
It also reflects its solid financial fundamentals in terms of efficiency, capitalisation and low risk liability profile, and its expertise in the fields of information technology, asset management and product design, Moody's says in a credit opinion published on Friday.
Based in Johannesburg, OMLACSA is Old Mutual plc's fully owned South African life assurance subsidiary and the group's largest operation in the country by asset size.
According to Moody's, it's already strong capital position continues to improve (SCAR coverage after regulatory limitations up to around 3.5x in 2007 and 2006 from 2.8x at year end 2005) with significant statutory profits emerging from what is a very mature business. The participation in other financial sectors through Nedbank (banking) and Mutual & Federal (general insurance) lends further support to the A1 IFSR, although Moody's notes that Old Mutual is currently in discussions to sell a controlling stake in M&F to Royal Bafokeng.
"Less positively, Moody's notes the continued negative net fund cash flow in 2007 of around R6bn dominated by the group segment.
"This follows the negative cash flow in 2006 of around R6.5bn (following R8.1bn in 2005), caused by a continued increase in levels of terminations, being partially offset by a lower level of maturing policies in 2006 and a significant increase in single premium business.
"This is in part due to changes in the product landscape in the South African market where, in Moody's opinion, OMLACSA has made significant progress in addressing through product improvements and operational change.
"These market changes have resulted in a contraction of new business margins relative to historic norms and in Moody's view this is a permanent feature of the market.
"Recently there has been a fair amount of activity in the South African market around the treatment of customers and disclosure, most notably the Pension funds adjudicator rulings on early termination values. Moody's notes the actions already taken by OMLAC(SA) and does not currently envisage a major weakening of financial strength as a result of any of these issues.
Moody's lists as OMLACSA's credit strengths: very strong domestic franchise; robust capital position; superior and cost efficient IT systems; majority stake in Nedbank provides bank distribution channel; and strong shareholder cash flow generation.
As credit challenges, it lists the following: - Restoration of a positive net customer cash flow position on the life fund through a combination of increased new business sales and reduced levels of exits -Ongoing competition and margin pressures in South African life market -Maintaining a product set which fully reflects and satisfies evolving customer requirements.
