Johannesburg, 1 August 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Santam Limited of AAA(ZA), with the outlook accorded as Stable. Global Credit Ratings has also affirmed the national scale subordinated debt rating accorded to Santam Limited of AA-(ZA), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Santam Limited of BBB-, with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Santam Limited (“Santam”) based on the following key criteria:
Santam’s competitive position is considered to be a material rating strength. The company is the market leader in the short term insurance industry, with a 19% share of GWP, and a premium base of 15x the industry average in FY16. GCR considers Santam to be well positioned to sustain its competitive strength, on the back of its high levels of capacity and technical expertise, entrenched intermediary relationships and strong franchise value.
Santam’s business mix is very well diversified across business lines, market segments and distribution channels. The insurer is the largest player in five of the seven statutory lines of business, each of which reflects material net premium scale. In GCR’s view, the strong representation in both the specialised and commoditised market segments is a sustainable competitive differentiator.
Despite a moderation at FY16, Santam has maintained a sound level of risk adjusted capital adequacy. Based on statutory interim measures, Santam’s SCR cover stood at 1.4x at FY16 (FY15: 1.5x), after accounting for the R800m special dividend. Going forward, the insurer aims to manage economic and regulatory Solvency Capital Requirement cover within management’s target bands, implying that capital strength will be sustained over the rating horizon. This is supported by a demonstrated capital management framework, with the company’s internally developed, risk-based model being well entrenched in operations and strategic decision making. Furthermore, Santam uses a mature and embedded Enterprise Risk Management framework, which has been independently assessed and is integrated into operations and capital allocation.
Santam’s operations have been highly cash generative over the review period, with cumulative operating cash flow equating to 97% of corresponding after tax profits. This is further supported by a large portion of readily redeemable instruments, contributing to sound liquidity metrics. GCR expects liquidity levels to remain robust over the rating horizon, underpinned by strong operational cash generation and consistency in investment allocation. Higher risk investment assets represented 67% of capital at FY16 (FY15: 69% after adjusting for the Saham acquisition), implying an intermediate degree of asset risk.
Santam’s earnings capacity is viewed to be strong, having evidenced profit resilience through adverse underwriting cycles. The insurer’s underwriting margin has averaged 5% over the review period, versus the cumulative underwriting loss posted by its larger intermediated peers. GCR expects net profitability to be sustained going forward, although noting the potential for capital market fluctuations to introduce a degree of variability.
The rating is supported by the insurer’s integrated position within the Sanlam group, with a high level of strategic alignment emanating from the short term offering, which complements the group’s comprehensive product range.
GCR assesses Santam’s debt serviceability metrics to be sound on an aggregate basis. Despite the increase in gross gearing, this remained within a low range, while the insurer continued to be ungeared on a net basis. Furthermore, the assessment of interest coverage considers the strong operational cash coverage metric.
Both the national and international scale claims paying ability ratings are at their respective rating ceilings. Downward rating adjustments may arise if there is significant and sustained weakening in earnings capacity and/or compression in risk adjusted capitalisation below targeted levels.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2009)||Initial rating (July 2013)|
|Claims paying ability: AAA(ZA)||Claims paying ability: A-|
|Outlook: Stable||Outlook: Stable|
|Last rating (May 2017)||Last rating (May 2017)|
|Claims paying ability: AAA(ZA)||Claims paying ability: BBB-|
|Outlook: Stable||Outlook: Negative|
|NATIONAL SCALE SUBORDINATED DEBT RATINGS HISTORY|
|Initial rating (June 2009)|
|Long term subordinated debt: AA-(ZA)|
|Last rating (May 2017)|
|Long term subordinated debt: AA-(ZA)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Marc Chadwick|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Criteria for Rating Insurance Companies’ Debt and Hybrid Equity Instruments, updated July 2016
Santam 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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Santam 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 Santam Limited with no contestation of the rating.
The information received from Santam Limited and other reliable third parties to accord the credit rating included:
- The latest audited financial statements to 31 December 2016
- Four years of comparative audited financial statements to 31 December
- Budgeted income statement to 31 December 2017
- Year to date management accounts to May 2017
- Quantitative statutory return to 31 December 2016
- The current reinsurance programme summary
- Other relevant documents
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
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|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.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|Gearing||Gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|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.|
|Interest||Money paid for the use of money.|
|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.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a detailed glossary of terms please click here
GCR affirms Santam Limited’s rating of AAA(ZA); Outlook Stable