decisive step towards eliminating a major problem with the decision
to close Old Mutual Bermuda (OMB), the offshore unit of its US life
insurance operation, to new business.
“One of our key priorities is
strengthening governance and risk management and we have taken the
decision to close OMB to new business with this in mind,” said
Julian Roberts, Old Mutual Group CEO. Roberts replaced Jim
Sutcliffe as CEO in September 2008.
Established in May 2000, OMB focused on the
sale of US dollar-denominated investments to international
investors outside the US. The major problem that beset OMB in 2008
was its guaranteed products. These included the Universal Guarantee
Option, a rider to OMB’s Universal Investment Plan, which
guaranteed the policyholder’s account value would grow by 5 percent
over five years and by 20 percent over 10 years.
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Hedging strategies on guaranteed products
proved to be extremely inadequate, resulting in OMB delivering a
total loss of $508 million in 2008. During 2008 Old Mutual injected
$582 million in capital into OMB.
Old Mutual’s onshore US operations spearheaded
by OM Financial Life (OMFL) also fared badly in 2008, also largely
as a result of an inadequate hedging strategy, reporting an
operating loss before tax of $425 million compared with a profit of
$111 million in 2007. Overall Old Mutual’s US operations (including
OMB), reported a $1.11 billion net after tax loss in 2008 compared
with a profit of $65 million in 2007.
US onshore operations are now the subject of
restructuring including reduced sales volume but of more profitable
products. In 2008 the US onshore operation reported sales on an
annual premium basis of $251 million, down from $312 million in
2007.
Following release of the results rating agency
Moody’s announced that it had downgraded OMFL’s insurance financial
strength rating to Baa3 from Baa1 with a “negative outlook”.
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By GlobalDataMoody’s noted that OMFL’s large unrealised
investment loss ($2.6 billion at the end of 2008) “might foreshadow
substantial additional credit losses to be incurred in 2009 and
subsequent years.”
