Johannesburg, 02 July 2018 — Global Credit Ratings has today affirmed the national scale financial strength rating assigned to Sanlam Life Assurance Limited, formerly Pan Africa Life Assurance Limited, of AA-(KE), with the outlook accorded as Negative. The rating is valid until June 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Sanlam Life Assurance Limited (“Sanlam Life Kenya”) based on the following key criteria:
The Negative outlook reflects the potential for Sanlam Life Kenya’s risk adjusted capitalisation to measure below expectations over the outlook horizon, given execution risks in capital remediation measures proposed. The insurer’s risk adjusted capitalisation measured at rating sensitive levels at FY17, depressed by elevated market risk and higher risk margin requirements. Accordingly, the statutory capital adequacy ratio reduced to the regulatory minimum, while exhibiting potential to be sustained below the peer group average over the short term. GCR has considered the clearly delineated balance sheet de-risking exercise premised on the disposal of investment property in FY18 and FY19, and the fair level of success registered in disposing held-for-sale investment properties in FY18, together with prudent credit risk management and underwriting risk containment as possible risk mitigation measures. However, comparatively low solvency resilience in stressed scenarios, coupled with execution risks of successive property disposals (especially sizable transactions) within expected timeframes are viewed as sources of potential rating pressure.
Sanlam Life Kenya accounted for a lower 9% (FY16: 10%) of long term industry gross premiums in FY17. The reduction was largely on the back of reduced uptake of annuity products, with greater emphasis being placed on product portfolio reorganisation aimed at strengthening representation in the individual life market, while tolerating relationship losses in non-profitable contracts. In this respect, a gradual clawback in market share is expected over the medium term, as market participants align premium growth and product pricing with risk based capital requirements, further supported by improved distribution channel efficiencies and strengthened product development capabilities.
Earnings capacity registered within an intermediate range over the review period, with a consistently elevated benefit experience offset by an efficient cost structure. As such, the insurer’s five year benefit to total income ratio measured at 71% against a corresponding operating expense ratio of 17%, yielding an average operating margin of 8% (FY17: 9%). The improvement in the review year operating margin accommodated a significant once-off write down on a corporate bond, which underscores a level of success in policies aimed at improving headline profitability. As such, earnings capacity could improve over the medium term, should prudent underwriting disciplines remain in place. Furthermore, the quality of Sanlam Life Kenya’s reinsurance program is considered sound, while maximum net deductibles are viewed to be conservative relative to both capital and net premiums.
Liquidity measured at a moderately strong level, exhibiting cash coverage of short term liabilities of 1.2x, while the investment portfolio displayed a similar coverage of policyholder liabilities at FY17. Further term asset liability management reflects a moderately strong matching of risks, facilitated by overall and per-liability class surplus positions, with a high weighting towards government securities. Increased exposure to liquid investments is expected going forward in line with the liability-driven investment philosophy supported by actuarial guidance.
GCR views Sanlam Life Kenya’s stand-alone credit profile to be supported by implied shareholder support, reinforced by the rebranding exercise undertaken. Sanlam Life Kenya is majority-owned by South African based Sanlam Limited (“the group”). This view is further supported by technical expertise, systems integration and operational support available from the group.
Downward rating pressure may emanate from risk adjusted capitalisation measuring below expectations or if statutory solvency registers below minimum regulatory requirements, resulting in regulatory action. The rating currently matches the national scale ceiling applicable to entities operating within the Kenyan insurance industry. In this regard, positive rating action may follow an assessment of country and industry risk factors. However, management’s ability to remedy capitalisation in line with targets may result in the rating reverting to a “Stable” outlook.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2009)|
|Financial strength: A+(KE)|
|Last rating (September 2017)|
|Financial strength: AA-(KE)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Yvonne Mujuru|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Long Term Insurance Companies, updated May 2018
Pan Africa Life Assurance Limited rating reports, 2009- 2016
Sanlam Life Assurance Limited rating report, 2017
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Sanlam Life Assurance Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to Sanlam Life Assurance Limited with no contestation of the rating.
The information received from Sanlam Life Assurance Limited and other reliable third parties to accord the credit rating included:
- Audited financial results of Company as at 31 December 2017
- Four years prior audited financial statements
- Unaudited interim results to 31 March 2018
- Budgeted financial statements for 2018
- Actuarial valuation statement for 2017
- Financial condition report for 2017
- The current year reinsurance cover notes
- Other non-public statistical information
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Reinsurance||The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|Stop Loss||Any provision in a policy designed to cut off an insurer’s losses at a given point. In effect, a stop loss agreement guarantees the loss ratio of the insurer.|
|Underwriting||The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.|
For a detailed glossary of terms please click here