Announcements Insurance Rating Alerts

GCR affirms Sanlam Life Insurance (Tanzania) Limited’s national scale financial strength rating of AA-(TZ); Outlook revised to Stable on solvency improvement

Rating action

Johannesburg, 27 October 2021 – 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 revised to Stable from Negative.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Sanlam Life Insurance (Tanzania) Limited Financial strength National AA-(TZ) Stable Outlook

Rating rationale

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 reduction 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. The revision of the Outlook from Negative to Stable is underpinned by management’s commitment to managing dividends within a rating adequate range, with the review year improvement in risk adjusted capitalisation viewed to be in line with expectations.

Risk adjusted capital adequacy remained strong, supported by a sizeable capital base, and relatively low level of market exposure and insurance risk. Accordingly, the GCR capital adequacy ratio (“CAR”) registered at 2.0x at FY20 (FY19: 1.7x). While note is taken of the management of capital in line with group parameters, we believe the metric is likely to be managed above 1.7x over the medium term, through enhanced dividend control.

Earnings capacity is viewed to be healthy, and supportive of the rating going forward, with the review year recovery in earnings from prior year pressures reflecting a level of resilience in the business model. As such, Sanlam Tanzania’s operating margin equated to a healthy 11% in FY20 (FY19: 7%), supported by a favourable claims profile and fairly stable operating cost structure. We expect the insurer’s earnings to moderate in FY21 as a result of an increase in claims, impacted by the covid 19 pandemic. In this regard, Sanlam Tanzania recorded a TZS3.3bn loss at 9M F21 translating to an operating margin of -4% which we expect to be sustained to the end of the year. We, however, expect a recovery in FY22 earnings, supported by management’s plans to align pricing to the level of claims.

Although showing a slight improvement in FY20, Sanlam Life Tanzania’s liquidity remained negative to the rating, affected by continuous dividend extraction. In this respect, the liquidity ratio equated to 1.2x at FY20 (FY19: 1.1x), while cash and stressed financial assets covered operational costs by a steady 11 months (FY19: 10 months). We expect liquidity to register within a similar range going forward, reflecting our view of more conservative capital management strategies.

Sanlam Life Tanzania’s business profile is viewed to be sound, anchored by the insurer’s competitive position. The insurer is the dominant player in the domestic life market, accounting for approximately 70% of total industry gross premiums in FY20. This is supported by an entrenched position in the group credit life space, facilitated by long standing business relationships with key bancassurance and corporate affiliates. However, premium diversification is viewed to be limited, with the bulk of premiums being derived from the credit life book, exhibiting single source concentration. This is further compounded by single market concentration, with all premiums sourced from Tanzania.

Outlook statement

The Stable Outlook reflects expectations that risk adjusted capitalisation could remain within a strengthened range and the likelihood of liquidity remaining at current levels. As such, the GCR CAR is likely to register above 1.7x, 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.

Rating triggers

Positive rating action could result from a sustained strengthening in capitalisation, while managing earnings and liquidity within a supportive range. Conversely, the rating may be downgraded should the insurer evidence a reduction in earnings, and/or if liquidity metrics beyond expectations.

Analytical contacts

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, October 2021
GCR Insurance Sector Risk Scores, September 2021

Ratings history

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) Negative October 2020

Risk score summary

Rating components and factors Risk scores
Operating environment 6.75
Country risk score 3.75
Sector risk score 3.00
Business profile 0.50
Competitive position 1.25
Premium diversification (0.75)
Management and governance 0.00
Financial profile 1.00
Earnings 0.50
Capitalisation 1.25
Liquidity (0.75)
Comparative profile 1.00
Group support 1.00
Government support 0.00
Peer analysis 0.00
Total score 9.25

Glossary

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.

The credit rating has been disclosed to the rated entity. 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 2020;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2021;
  • Unaudited interim results to 30 September 2020; and
  • Other relevant documents.


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