A.M. Best Downgrades Issuer Credit Ratings of Old Mutual plc; Revises Outlook to Stable.

OLDWICK, N.J. -- A.M. Best Co. has downgraded the issuer credit rating (ICR) to "bbb+" from "a-" of Old Mutual plc (Old Mutual) (United Kingdom), the ICRs to "a" from "a+" of its key European and South African subsidiaries and the debt securities issued by Old Mutual and its subsidiaries. Concurrently, A.M. Best has affirmed the financial strength rating (FSR) of A (Excellent) of Old Mutual's European and South African subsidiaries.

At the same time, A.M. Best has downgraded the financial strength rating (FSR) to A- (Excellent) from A (Excellent) and issuer credit ratings (ICR) to "a-" from "a" of Old Mutual's U.S. life/health subsidiaries (OM Financial). The outlook for all ratings has been revised to stable from negative. (See below for a detailed listing of the companies and ratings.)

The rating actions follow Old Mutual's announcement of its 2008 results, which shows weaknesses in its U.S operations, and also a decline in the group's overall risk-adjusted capitalisation.

Old Mutual's overall 2008 profit reduced to GBP 595 million, compared to GBP 1.8 billion in 2007. Despite being positive, the financial performance benefited from the effect of widening credit spreads on the group's debt (GBP 514 million), which largely offset material losses on its U.S. operations (GBP 834 million [down from a profit of GBP 200 million in 2007]). The negative financial performance arising from OM Financial, as well as the need for additional capital injections during the year (USD 900 million), dragged down the group's overall financial performance and capitalisation in 2008.

A.M. Best believes that the negative financial performance of Old Mutual's U.S. operations partially reflects the historical inadequacy of the company's risk management, which came to light in the second half of 2008, following problems with the hedging programme on its U.S. offshore business. A.M. Best, however, acknowledges the steps that the company has taken since then to improve its risk management, which include a number of high profile management changes that were followed by a review of strategy and risk oversight across the group. A.M. Best also believes that the underlying financial performance of Old Mutual's European and South African subsidiaries remains robust, particularly Old Mutual Life Assurance Company (South Africa) Ltd, which, despite its 20% profit decline in 2008, remains the single largest profit contributor to the group.

Old Mutual's risk-based capitalisation declined in 2008, following a significant reduction in the value of its in-force business (VIF) to GBP 1.8 billion (on an MCEV basis), down from GBP 4.5 billion in 2007 (on an EEV basis). The reduction in reported VIF is in large part due to changes in the timing of recognition of profits between EEV and MCEV reporting methods, particularly in relation to spread business, such as that written by OM Financial (which explains approximately GBP 2.1 billion of the reduction). A.M. Best believes that part of the reduction in VIF is due to a realignment of the company's economic expectations on this business to a level that better reflects the inherent risks.

A.M. Best acknowledges Old Mutual's decision to withhold payment of dividends in 2009 (GBP 373 million in 2008) as a positive step that helps reduce further strain on its capital position. In A.M. Best's opinion, Old Mutual's liquidity remains robust, and the group's existing credit lines are sufficient to meet its cash-flow needs in the short to medium term.

The FSR of A (Excellent) has been affirmed and the ICR has been downgraded to "a" from "a+" for the following subsidiaries of Old Mutual plc:

* Old Mutual Life Assurance Company (South Africa) Ltd

* Skandia Insurance Company Ltd.

* Skandia Life Assurance Company Limited

* The debt rating has been downgraded to "bbb" from "bbb+" for the following: Old Mutual plc-- -- GBP 350 million perpetual preferred callable securities -- USD 750 million 8% guaranteed cumulative perpetual preferred securities -- GBP 300 million 10-year non-call, 5-year subordinated notes, due 2016 Old Mutual Life Assurance Company (South Africa) Ltd-- -- ZAR 3 billion 8.92% unsecured subordinated callable notes, due 2020

The FSR has been downgraded to A- (Excellent) from A (Excellent) and the ICRs to "a-" from "a" for the following U.S. life/health subsidiaries of Old Mutual plc:

* OM Financial Life Insurance Company

* OM Financial Life Insurance Company of New York 

For Best's Debt Ratings, all other Best's Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors, which may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.