Johannesburg, 03 December 2019 – GCR Ratings (“GCR”) has affirmed Sanlam Life Insurance Limited’s (“Sanlam Life Kenya”) national scale financial strength rating of AA-(KE), with the Outlook maintained on Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Sanlam Life Insurance Limited||Financial strength||National||AA-(KE)||Negative Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Sanlam Life Kenya was placed ‘Under Criteria Observation’. GCR finalised the review for Sanlam Life Kenya under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Sanlam Life Kenya has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
Sanlam Life Kenya’s national scale financial strength rating reflects the strengths and weaknesses of Sanlam Kenya Plc (“the group”). Sanlam Life Kenya is the group’s core operating entity contributing 68% and 83% of gross premiums and assets respectively at FY18.
The rating affirmation reflects the group’s healthy business profile and implied strategic support from the ultimate parent, Sanlam Limited (“Sanlam”). However, capitalisation remained a rating sensitivity despite a capitalisation plan that supported capital adequacy at subsidiaries, with the group’s metrics measuring within a weak range due to a sizeable impairment on financial assets that exacerbated already strained risk adjusted capitalisation, during the review year. While management has presented a plan to improve group and subsidiary capitalisation through the disposal of investment properties and enhanced internal capital generation (with significant improvements expected at the level of subsidiaries), the group’s risk adjusted capitalisation remained subdued. In this respect, GCR views the capitalisation plan, funded by a two year loan to the group, to be subject to a fairly high level of execution risk, with the possibility of its core components not performing to expectations underpinning the Negative Outlook.
The reduction in the group capital base to KES1.6bn at FY18 (FY17: KES4bn), followed a once off KES1.9bn review year write off, largely from the impairment of financial assets. This resulted in the suppression of the GCR Capital Adequacy Ratio (“CAR”) to well below 100%, although subsidiaries were adequately capitalised through debt and equity injections funded by a loan contracted at group level. In this regard, regulatory capital adequacy ratios for subsidiaries were remedied to 103% (3Q F19: 173%) for Sanlam Life Kenya and 120% for Sanlam General Insurance Limited (“Sanlam General Kenya”) at FY18, from very weak interim levels. Despite improved internal capital generation at Sanlam Life Kenya, causing a partial recovery in the group’s capital base to KES2.2bn at 1H F19, the CAR remained at weak levels. The rating factors in expectations of increased convergence between the group’s CAR and that of subsidiaries, albeit noting potential for shortfalls relative to management’s targets, given uncertainties associated with reliance on investment property disposals to fund loan repayments.
Liquidity measured within an intermediate range supported by the two year USD34m loan from Sanlam Capital Markets. As such, coverage of net technical liabilities by cash and stressed assets measured at 1.1x, offsetting the significant write-offs on financial assets. Going forward, the maintenance of liquidity sufficiency is contingent upon the timely disposal of investment properties to fund the redemption of the loan, presenting further rating sensitivity.
Earnings capacity measured within an intermediate range, with a sound headline earnings trend at Sanlam Life Kenya offset by weaker earnings at Sanlam General Kenya. In this regard, both the review period operating margin and return on revenue equated to 4%. However, potential for a sustained turnaround in underwriting performance in the general business (noting positive performance in the recent two year cycle), coupled with reduced earnings strain from annuity business, is likely to more than offset short term pressures from borrowing costs, albeit with margins expected to remain relatively compressed.
The business profile is intermediate, reflecting healthy participation on insurance contracts and solid franchise in investment contracts, while the short term business presents scalable diversification benefits. The group’s weighted market share and relative market share measured at 6.3% (FY17: 6.4%) and 1.6x (FY17: 1.7x) respectively in FY18, balancing Sanlam Life Kenya’s strong market share with relatively limited premium scale at Sanlam General Kenya. In this regard, the group’s strong network of relationships and product structuring competencies, albeit moderated by structurally high competitive hurdles in the short term industry, are expected to support the business profile within the current range.
Furthermore, the rating benefits from parental support, given brand and operational alignment, together with demonstrated financial support of business units.
The Negative Outlook is premised on potential for execution risks associated with the capitalisation plan, which could result in risk adjusted capitalisation measuring below expectations.
An upward rating movement is unlikely over the medium term. However, a reversion to a Stable Outlook may be considered if risk adjusted capitalisation is managed within the expected range.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||Godfreyc@GCRratings.com||+27 11 784 1771|
|Committee chair||Susan Hawthorne||Senior Credit Analyst|
|Johannesburg, ZA||Susanh@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2019|
|GCR Insurance Sector Risk Scores, November 2019|
Sanlam Life Kenya
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Financial Strength||Initial||National||A+(KE)||Stable||November 2009|
Risk Score Summary
|Risk scores||Sanlam Life Kenya|
|Country risk score||4.50|
|Sector risk score||4.75|
|Management and governance||0.00|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|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.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|Interest||Money paid for the use of money.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|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.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|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.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of rated entities, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Sanlam Life Insurance Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Sanlam Life Insurance Limited participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Sanlam Life Insurance Limited and other reliable third parties to accord the credit rating included:
- Group and company audited financial results as at 31 December 2018;
- Four years of comparative group and company audited financial statements to 31 December
- Full year budgeted financial statements to December 2019;
- Unaudited interim results to 30 October 2019;
- Actuarial valuation report for 2018;
- Reinsurance cover notes for 2019; and
- Other relevant documents.