Old Mutual is rocked by US Credit crisis and resignations

JOHANNESBURG – OLD Mutual suffered another change in leadership and was still vulnerable to the US credit crisis, Moody’s Investors Service said yesterday. The ratings agency said Old Mutual’s credit profile was under pressure due to deteriorating credit quality at Old Mutual Financial.

The company recently lost $237 million in the AIG fiasco.

Old Mutual has announced a host of write-downs this year, mostly with regard to its troubled US Life business. Bruce Parker was appointed CEO of US Life in June, but he resigned yesterday and was replaced by Chris Chapman, the former MD of CSC Financial Services Group.

Two weeks ago, this business wrote down another $50m after Lehman Brothers collapsed. Old Mutual has not yet detailed any exposure it might have had to Washington Mutual, the US bank bought up by JPMorgan last week, or to Wachovia, the US bank rescued by Citigroup yesterday. As the banking crisis spreads, Old Mutual may have to reveal its exposure to, among others, Fortis or UBS.

Merrill Lynch downgraded the stock to "underperform" from "neutral" last week, but Moody’s maintained its rating to reflect "the intrinsic financial strength of its various operating units". It said the A3 rating also reflected "the material proportion of earnings derived from SA, presenting an element of sovereign risk. However, following the Skandia acquisition, Moody’s views the group’s profit profile as becoming more diversified over time."

Old Mutual’s share price has lost more than 50% this year and wiped out 19% this month. Yesterday it hit lows of R10,30, levels not seen since 2003.

Alwyn van der Merwe, director of investments at Sanlam Private Investments, said yesterday that with a price-earnings ratio of four, Old Mutual was trading at a 50% discount to embedded value. At Old Mutual’s interims last month, analysts asked whether it would sell US Life, but the CEO at the time, Jim Sutcliffe, promised to fix it. A few weeks later, amid more write-downs, Sutcliffe resigned and the new CEO, Julian Roberts, said he was evaluating the US business and would have a full report within 60 days of his taking the reins. Roberts’s appointment has not given Old Mutual’s share price the hoped-for fillip, but the company does keep assuring the market that the write-downs are not material and that there are significant cash reserves.

Moody’s said US Life had substantial implicit support from its parent, adequate capitalisation and profitability, and a favourable expense structure. "These strengths are partially offset by heavy reliance on its parent for ongoing capital infusions; realised and potential future credit losses in the investment portfolio; the company’s relatively small size in a consolidating industry; aggressive recent growth; heavy reliance upon outsourcing; and a large outstanding block of fixed- indexed annuities, which are potentially subject to regulatory and litigation risks." Moody’s was more upbeat about the US asset management business and found the turnaround in South African subsidiary Nedbank encouraging.

Challenges for Old Mutual included limiting exposure and the potential for further reserve strengthening at its Bermudan variable annuity business; deterioration of credit quality at Old Mutual Financial; and improving risk management systems. Business Day