Old Mutual Financial Network has had its insurer financial strength rating downgraded to BBB+ by Fitch.

The ratings company said it was concerned with the continued poor earnings performance of the Old Mutual PLC's (Old Mutual) US Life operations — which includes Old Mutual Financial Network (OMFN) as well as its Bermuda operations.

It added that the earnings could call into question Old Mutual's long-term commitment to this business.

Fitch downgraded the company from A- following the recent report of Old Mutual's interim results for the first half of the year. The results included an investment impairment of $149 million pretax primarily relating either directly or indirectly to subprime residential mortgage-backed securities and a reserve strengthening in its Bermuda variable annuity business of $212 million pretax. Neither of these charges are viewed as material to Old Mutual. However, both signify additional weakness in the US Life operations that Fitch was not anticipating.

OMFN's remaining exposure to direct sub-prime is about $720 million and $600 million in monoline insurer exposure on a $20 billion portfolio. It should be noted that 99 percent of the remaining sub-prime exposure remains above an 'AA' rating and 89 percent of the monoline is indirect exposure.

The variable annuity charge was taken on Old Mutual's Bermuda operations. It was primarily related to ineffective hedges on certain minimum return guarantees, particularly as they related to the Asian markets which were extremely volatile in the second quarter. The company has ceased offering the guarantee riders on all of its products (not just in the Asian market) until it completes a thorough review of the overall effectiveness of its hedging programme.

Fitch views positively the changes Old Mutual has made in response to the disruption in the Bermuda business with regard to its risk management oversight in the US, which encompasses all products, not just the VA business. As part of these actions, Old Mutual has assigned its Group Finance Director and Group Head of Risk to review all aspects of the U.S. Life business.

Additionally, it appointed Bruce Parker as CEO of the US Life operations, has asked the COO to leave, and assign Don Hope, formerly the Group Treasurer to run the Bermuda business.