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March 7 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned South Africa-based MMI Group Limited's (MMI) proposed issue of subordinated debt securities of ZAR1.5bn an 'A+(zaf)(EXP)' expected rating, and affirmed MMI's outstanding subordinated debt at 'A+(zaf)'. This is in line with Fitch's standard notching practices.
The final rating is contingent on the receipt of final documents confirming the information already received.
Fitch has simultaneously affirmed MMI's National Insurer Financial Strength (IFS) rating at 'AA+(zaf)' and National Long-term rating at 'AA(zaf)' and MMI Holdings Limited's National Long-term rating at 'AA-(zaf)'. The Outlooks are Stable.
MMI expects to use the proceeds of the proposed subordinated debt issue to support its strategic growth plans. The new issue is expected to increase financial leverage on a pro-forma basis to 13.6% from 8.7% based on end-1H14 figures.
MMI is proposing to issue a floating rate note with a 10-year maturity, callable after five years (MMIG01), and a fixed rate note with a 12-year maturity, callable after seven years (MMIG02). The floating rate coupon will be payable quarterly, and will be determined on the auction date by reference to three-month JIBAR. The fixed rate coupon will be payable semi-annually, and will be determined on the auction date by reference to the yield on the R208 bond. The notes include a mandatory interest deferral feature which is triggered when the company's level of regulatory minimum capital requirement is breached. The subordinated debt has been structured for Tier 2 Own Funds eligibility according to QIS3 specifications under the Solvency Assessment and Management regime. According to Fitch's methodology, this subordinated bond is classified as 100% capital due to regulatory override within Fitch's risk-based capital calculation and is classified as 100% debt for the agency's financial leverage calculations.
MMI group's ratings reflect its continued improvement in profitability since the merger between Momentum Group Limited and Metropolitan Holdings Limited in 2010. MMI reported an increase in core headline earnings for the six months to 31 December 2013 (1H14) of 12.3% to ZAR1.7bn (1H13: ZAR1.5bn).
MMI group has a solid domestic franchise as one of South Africa's four largest insurance groups, with two strong client facing brands (Momentum and Metropolitan).
The group's capital adequacy, on both Fitch's internal assessment as well as a statutory solvency basis, is viewed as strong for the ratings. MMI reported statutory cover of 2.6x at end-1H14 (FYE13: 2.6x).
The group's equity exposure is considered high for the ratings. However, Fitch recognises that these holdings mostly back discretionary participating policies where clients assume most of the investment risk. Assets backing the group's shareholder funds are conservative, and overall Fitch continues to view its investment risk as acceptable for the rating.
A downgrade of the group's ratings could result from a substantial deterioration in capitalisation either based on Fitch's internal assessment or on the statutory capital adequacy ratio (CAR), in particular if MMI's reported CAR fell below 2.0x for a sustained period.
A sustained poor operating performance driven by a decline in the equity market, a reduction in new business margins relative to its peers or a material loss of market share could also result in a downgrade, as would a weakened outlook for South African life insurers based on further economic weakness.
Fitch considers an upgrade unlikely in the medium term. However, over the longer term, the group's ratings could be upgraded if it continues to improve its profitability significantly relative to peers and increases its market share.