Johannesburg, 19 October 2020 – GCR Ratings (“GCR”) has affirmed Sanlam Life Insurance (Tanzania) Limited’s (“Sanlam Life Tanzania”) national scale financial strength rating of AA-(TZ), with the Outlook accorded as Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Sanlam Life Insurance (Tanzania) Limited||Financial strength||National||AA-(TZ)||Negative Outlook|
Sanlam Life Tanzania’s rating affirmation reflects a sound business profile, underpinned by the insurer’s robust competitive position, albeit offset by limited premium diversification. The financial profile is viewed to be healthy, although it has reduced from stronger historical levels mainly due to weakening capitalisation and liquidity (a function of high dividend extraction over the review period), compounded by the recent moderation in earnings. In GCR’s view, the recent deterioration in the financial profile is somewhat balanced by implicit group support from the ultimate parent, Sanlam Limited (“the group”), given the insurer’s solid history of performance, complemented by brand alignment and integration into group platforms and management systems.
However, the rating remains sensitive to further dividend extraction, which could moderate capitalisation metrics and prevent a recovery in depressed liquidity metrics, underpinning the Negative Outlook.
Sanlam Life Tanzania’s risk adjusted capital adequacy followed a downward trend over the review period as a result of material dividend extractions amidst earnings strain, which reduced the absolute capital value from TZS14.1m at FY15 to TZS11.3m at FY19. Consequently, the GCR capital adequacy ratio (“CAR”) moderated to 1.7x from 3.2x at FY15. Note is taken of management’s target of a sound buffer above minimum statutory solvency requirement. However, continued dividend extraction could lower capitalisation metrics below a rating adequate range.
Earnings moderated from a strong to an intermediate range over the review period. This is largely a function of a significant reduction in investment returns and increase in claims, with the insurer recording an average operating margin of 10.8% over the last five years, compared to an average of 18.5% over the prior five-year period. Going forward, GCR expects Sanlam Life Tanzania’s earnings to remain intermediate, factoring downside risks from the COVID-19 pandemic.
Sanlam Life Tanzania’s liquidity is viewed to be negative to the rating, affected by continuous dividend extraction. In this respect, the liquidity ratio equated to 1.1x at FY19 (FY18: 1.3x; FY15: 1.9x), while cash and stressed financial assets covered operational costs by a steady 10 months (FY15: 12 months). GCR expects liquidity to register within a similar range going forward, factoring in possible future dividend distributions, representing a key rating sensitivity.
Sanlam Life Tanzania’s business profile is viewed to be sound, anchored by the insurer’s competitive position. In this regard, competitive position was maintained within a very strong range, supported by the insurer’s entrenched position in the group credit space. Accordingly, the insurer controlled a market share of 63% in FY19. In GCR’s view, Sanlam Tanzania is likely to remain the dominant player in the domestic long-term insurance market, facilitated by a strong brand as well as long standing business relationships with key bancassurance and corporate affiliates. Conversely, premium diversification is viewed to be limited, with the bulk of premiums being derived from the credit life book, exhibiting single counterparty concentration. This is further compounded by single market concentration, with all premiums sourced from Tanzania.
The Negative Outlook reflects expectations of a moderation in risk adjusted capitalisation and the likelihood of liquidity to remain below a rating adequate range. As such, the GCR CAR is likely to register around 1.5x, while liquidity coverage metrics are expected to remain around 1x, factoring in potential for continued dividend extraction (albeit with GCR cognisant of the discretionary nature of the dividend payments). Meanwhile, no material changes on the business profile are expected over the rating horizon.
Positive rating action is unlikely over the medium term although a sustainable turnaround in earnings could be viewed positively. The Outlook may revert to Stable if the financial profile improves to rating adequate levels. Conversely, the rating may be downgraded should the insurer evidence a reduction in risk adjusted capital adequacy to a GCR CAR below 1.5x, and/or if liquidity metrics are sustained within the current range or weaken further.
|Primary analyst||Sylvia Mhlanga||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SylviaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@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, May 2020|
|GCR Insurance Sector Risk Scores, July 2020|
Sanlam Life Insurance (Tanzania) Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(TZ)||Stable||April 2010|
|Financial strength||Last||National||AA-(TZ)||Stable||December 2019|
Risk score summary
|Rating components and factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||3.00|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|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.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|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.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|Short Term||Current; ordinarily less than one year.|
|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.|
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 is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Subsequent to an appeal by the rated entity, the national scale financial strength rating and outlook were revised as reflected in the announcement. The credit rating has been disclosed to the rated party. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual 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 the entities and other reliable third parties to accord the credit rating included:
- Draft financial results as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2020;
- Unaudited interim results to 30 June 2020; and
- Other relevant documents.