Fitch Ratings said it has affirmed Sanlam Life Insurance Limited’s (Sanlam Life), Sanlam Developing Markets Limited’s (SDM) and Santam Limited’s (Santam) National Insurer Financial Strength (IFS) Ratings at ‘AAA(zaf)’.
Fitch said in its latest opinion that it has affirmed Sanlam Life’s parent and the ultimate holding company of the Sanlam group, Sanlam Limited’s (Sanlam) National Long-Term rating at ‘AA+(zaf)’. The Outlooks are Stable.
The affirmations reflect the Sanlam group’s resilient business position, capitalisation and operating performance relative to peers. Fitch also views favourably the diversification provided by Sanlam Emerging Markets (SEM), which contributed 20% to Sanlam’s operating profit in 2016. The group’s earnings and investment exposure to a weakening South African economy is a rating weakness.
See below the full rationale for the ratings:
KEY RATING DRIVERS
Sanlam’s well-established and diversified business position in South Africa is a key rating strength. Sanlam sells a wide range of investment, insurance and other personal finance products to individuals and institutional clients. Investment-type business is the main component (2016 and 2015: 64%) of total funds received, and is mainly derived from South Africa.
Santam, the group’s majority owned non-life subsidiary, is the largest general insurer in South Africa, with a strong domestic franchise and a market share of around 20%. It writes all classes of business and has a well-known brand in both commercial and personal lines.
Capital is conservatively managed, with Sanlam Life’s statutory capital adequacy requirement (CAR) cover ratio remaining strong and unchanged at 5.8x at end-2016, the highest level in its peer group. The group’s capital position is supportive of the group’s ratings with a Prism factor-based capital model (FBM) score of “extremely strong” at end-2016. Sanlam has continued using excess capital to invest in high-growth business opportunities both within and outside South Africa.
In May Sanlam redeployed discretionary capital (i.e. capital in excess of the company’s internally assessed capital requirements) of USD329 million toward a further 16.6% stake in Saham Finances S.A. (Saham), taking its total investment in Saham to USD704 million (around ZAR9 billion at current exchange rates) for a 46.6% stake. Fitch views favourably the diversification benefits of Saham’s holding; however, it is not clear if the transaction will prove earnings-accretive to the group. In January 2017 the group also announced its acquisition of a 53% stake of South African life insurer BrightRock for around ZAR700 million.
Sanlam’s financial leverage of 8% at end-2016 (end-2015: 6%) is well within Fitch’s guidelines for the ratings. The rise was mainly driven by a rise in Santam’s standalone financial leverage to 22% at end-2016 (end-2015: 10%) following a subordinated notes issue of ZAR1 billion in April 2016. Sanlam has indicated that it intends to raise up to the equivalent of USD140 million in debt related to the Saham acquisition. As a result Fitch expects Sanlam’s financial leverage to rise by up to four percentage points, but to remain within the limits for the ratings.
Earnings generation is strong, diversified and compares favourably with that of its leading peers. The group’s 2016 net operating profit improved 10% yoy, of which 7% represented organic growth and the balance a result of first-time contributions from previous acquisitions. This was supported by a 30% rise for SEM, supported by like-for-like growth of 45% in the ‘rest of Africa segment’, which excludes Namibia and Botswana. Fitch expects the aggregate operating profit contribution from SEM to rise, driven by the strong organic growth potential of the various underlying markets.
The group’s normalised headline earnings for 2016 decreased 6% following a 65% decline in net investment returns earned on Sanlam’s capital portfolio. This portfolio is exposed to equity market and currency volatility.
Santam has a long history of underwriting profitability, and in 2016 reported a strong combined ratio of 94%, in line with the 10-year average combined ratio of 94%, albeit weaker than 2015 (90%). The weaker result was mainly due to more catastrophe claims and higher motor repair cost. We expect recent storms and wild fires in the Western Cape to only weaken Santam’s 2017 combined ratio marginally, owing to the significant reinsurance protection that it has in place. Fitch views favourably Santam’s consistently strong operating performance and profitability track record.
Most South African-based life insurers have reported weakening net customer cash flows, reflecting a difficult local economic environment. In addition, the sector remains exposed to domestic credit and other investment risks through exposure to local financial markets. However, these risk factors do not adversely affect the life insurance sector’s creditworthiness relative to that of the South African sovereign.
Sanlam Life, SDM and Santam are assessed as “core” to the Sanlam group under Fitch’s insurance group rating methodology. Sanlam Life and SDM are fully integrated within the Sanlam group. Santam shares the group’s strategy, including providing essential support to the group’s emerging markets expansion.
RATING SENSITIVITIES
A substantial and sustained deterioration in capitalisation (in terms of Fitch’s Prism score or Sanlam Life’s CAR cover ratio), a weak operating performance or a severe weakening of market share could lead to a downgrade.
A downgrade of Santam’s ratings could be triggered by deterioration in Santam’s standalone profile to an extent that Fitch no longer considers Santam as core to Sanlam. This could result from a sustained weak operating performance and/or severe weakening in Santam’s market share.
FULL LIST OF RATING ACTIONS
Sanlam Life Insurance Limited
National IFS Rating: affirmed at ‘AAA(zaf)’; Outlook Stable
National Long-Term Rating: affirmed at ‘AAA(zaf)’; Outlook Stable
National Short-Term Rating: affirmed at ‘F1+(zaf)’
Subordinated debt: affirmed at ‘AA(zaf)’
Sanlam Developing Markets Limited
National IFS Rating: affirmed at ‘AAA(zaf)’; Outlook Stable
National Long-Term Rating: affirmed at ‘AAA(zaf)’; Outlook Stable
Santam Limited
National IFS Rating: affirmed at ‘AAA(zaf)’; Outlook Stable
National Long-Term Rating: affirmed at ‘AAA(zaf)’; Outlook Stable
Subordinated debt: affirmed at ‘AA(zaf)’
Sanlam Limited
National Long-Term Rating: affirmed at ‘AA+(zaf)’
