Johannesburg, 29 August 2017 — 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 Stable. The rating is valid until June 2018.
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:
Sanlam Life Kenya, reflects a strong credit profile. This is supported by a strong competitive position, moderately strong liquidity, and moderately strong capitalisation. The insurer’s capitalisation is expected to improve over the medium term, in line with the planned de-risking of the balance sheet. Earnings capacity is viewed to be intermediate, with the strategic shift toward individual life business likely to offset cost efficiencies derived from the revised commission structure. As such, earnings capacity is expected to remain at an intermediate level. Sanlam Life Kenya’s stand-alone credit profile is viewed to be supported by implied shareholder support.
Sanlam Life Kenya reflects a strong competitive position, with a market share of 10% of total gross industry premiums (FY15: 12%). The insurer’s competitive position has been supported by strong brand recognition, with the insurer reflecting sound representation in group life segments, as well as solid representation in the individual life market. The reduction in market share largely stemmed from the loss of group life portfolios, given competitive dynamics. In this respect, management expects to clawback market share, underpinned by expanding distribution channels and product development, which would serve to uphold competitive strength. Sanlam Life Kenya’s earnings profile reflects moderate diversification, as well as intermediate product risk, with the balance expected to be maintained over the medium term.
Earnings capacity has registered within an intermediate range over the review period. Profitability has been supported by a competitive expense ratio, a stable claims experience (reflective of a mature benefit profile), and healthy investment income inflows. In this regard, the five year aggregate operating margin equated to 7%, versus a peer group average of 10% (owing to a higher benefit experience). The operating margin increased to 10% in FY16, on the back of reduced commission expenses. Going forward, the insurer’s strategic objective to pursue individual life business is likely to partially suppress earnings, through high policyholder transfers, with management budgeting for an operating margin of 5% in FY17. As such, GCR expects earnings capacity to be maintained within an intermediate range over the rating horizon.
Liquidity has been measured at a moderately strong level, with total investment coverage of policyholder liabilities and deposit administration liabilities remaining stable at 1.1x throughout the review period. Liquidity is expected to measure within a moderately strong to strong range, underpinned by the planned sale of property holdings, in favour of more liquid assets. Furthermore, the insurer exhibits a moderately strong matching of the nature and term of assets with the nature and term of the liabilities, facilitated by a liability driven portfolio mandates.
The insurer’s risk adjusted capitalisation measured at a sound level, underpinned by healthy capital growth and containment of underwriting risks. Going forward, the pursuit of individual life business (which is inherently capital intensive) may impact insurance risk exposure levels over the medium term. However, the insurer’s planned balance sheet de-risking exercise is likely to offset this. Accordingly, GCR expects capitalisation to remain sound over the outlook horizon.
The quality of Sanlam Life Kenya’s reinsurance counterparties is considered sound, while maximum net deductibles are viewed to be conservative relative to both capital and net premiums. 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.
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. Over the short term, downward rating pressure may emanate from a weakening in the operating result and/or continued loss of relative market share. Over the medium term, deterioration of key credit protection metrics may also result in downward rating pressure.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (November 2009)|
|Financial strength: A+(KE)|
|Last rating (June 2016)|
|Financial strength: AA-(KE)|
|Primary Analyst||Committee Chairperson|
|Munyaradzi Mushure||Marc Chadwick|
|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 July 2017
Pan Africa rating reports, 2009- 2016
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 2016
- Four years prior audited financial statements
- Unaudited interim results to 30 April 2017
- Budgeted financial statements for 2017
- Actuarial valuation statement for 2016
- Financial condition report for 2016
- 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
GCR affirms Sanlam Life Assurance Limited’s rating at AA-(KE); Outlook Stable.