Fitch Upgrades OM Financial Life to 'BBB'; Outlook Stable

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CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has upgraded the Insurer Financial Strength (IFS) rating to 'BBB' from 'BB' of Old Mutual U.S. Life Holdings, Inc.'s (OM US Life) two life insurance subsidiaries, OM Financial Life Insurance Company (OM Financial) and OM Financial Life Insurance Company of NY(OM Financial NY), collectively referred to as OM Financial Companies,. In addition, Fitch has removed the rating from Rating Watch Positive and assigned a Stable Rating Outlook.

Fitch placed the ratings on OM Financial Companies on Rating Watch Positive on Aug. 9, 2010 following the announcement by Old Mutual plc of plans to sell OM US Life to an affiliate of Harbinger Capital Partners LLC (Harbinger) for $350 million.

Today's rating action follows the close of the proposed transaction. OM US Life is now a wholly owned subsidiary of Harbinger Group Inc. (HRG), a publicly traded holding company that seeks to acquire significant interests in businesses across a diverse range of industries. HRG is majority owned by investment funds affiliated with Harbinger.

The rating upgrade reflects the considerable improvement in OM Financial Companies' balance sheet fundamentals and earnings profile over the past year. Fitch views OM Financial of limited importance to HRG, in accordance with Fitch's group rating methodology. Within this framework OM Financial Companies ratings largely reflect its stand alone credit profile.

OM Financial Companies has made considerable progress over the past year refocusing operations, reducing expenses, improving capitalization, and restructuring its investment portfolio. Statutory earnings improved considerably in 2010 as OM Financial Companies reported positive net income for the first time in five years due to decreased expenses and a significant reduction in realized investment losses.

The improved earnings produced a 10% increase in Total Adjusted Capital (TAC), a 38 point increase in RBC to 350%, and improved operating leverage, without the aid of capital injections from Old Mutual that it historically needed. Also OM Financial Companies' insurance operating expense decreased from 15% to 9% of premiums and annuity considerations, and annuity surrenders decreased to 8% from its previous 11%-13% range. After-tax net realized capital gains (losses) improved by over $300 million.

Going forward OM Financial Companies plans to narrow its product focus mainly to the manufacture of equity indexed annuity and indexed universal life products for brokers, independent agents and institutional distributors.

Fitch's ratings concerns for the OM Financial Companies' include its relatively limited product diversification, competitive challenges in the company's target markets, uncertainty over HRG's financial flexibility, evolving corporate governance practices at HRG and Harbinger, and HRG's future acquisition activity and its potential impact on OM Financial Companies.

OM Financial Companies had statutory admitted assets of approximately $16.8 billion and total adjusted capital of approximately $903 million on Dec. 31, 2010. OM Financial Companies is headquartered in Maryland.

The key rating drivers that could result in an upgrade include:

--Prolonged RBC above 400% with operating leverage in the 15 times (x) range;

--Prolonged self sustaining capital growth through solid statutory earnings.

The key rating drivers that could result in a downgrade include:

--IF HRG is unable to provide financial support needed by OMFLIC and OMFLICNY;

--A prolonged drop in RBC to below 300% with operating leverage above 20x;

--A prolonged spike in annuity surrenders;

--Any significant issues with market conduct or regulatory environment.

Fitch has upgraded, removed from Rating Watch Positive, and assigned a Stable Outlook to the following ratings:

OM Financial Life Insurance Co.

OM Financial Life Insurance Co. of New York

--IFS rating to 'BBB' from 'BB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Insurance Rating Methodology (March 31, 2011);

--Life Insurance Ratings Methodology (Global) (March 31, 2011);

--Fitch's Approach to Rating Insurance Groups (March 31, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614266

Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=612905

Fitch's Approach to Rating Insurance Groups

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=586765

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