Johannesburg, 14 November 2019 – GCR has affirmed Santam Limited’s (“Santam”) national scale financial strength (formerly claims paying ability) rating of AAA(ZA), Stable Outlook and international scale financial strength rating of BB+, Stable Outlook. GCR has also assigned Santam a national scale long term issuer rating of AA+(ZA), with a Stable Outlook. GCR has also affirmed the national scale long term issue ratings of Santam’s outstanding subordinated callable notes (Stock Codes SNT02, SNT03, SNT04) of AA-(ZA), with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Santam Limited||Financial strength||National||AAA(ZA)||Stable Outlook|
|Financial strength||International||BB+||Stable Outlook|
|Long term issuer||National||AA+(ZA)||Stable Outlook|
|SNT02||Long term issue||National||AA-(ZA)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the ratings for Santam were placed ‘Under Criteria Observation’. GCR has finalised the review under the Criteria for Rating Insurance Companies, May 2019. As a result, the ratings have been reviewed in line with the new methodology, and subsequently removed from ‘Under Criteria Observation’.
Santam’s ratings reflect its status as the core operating entity in the Santam group (“the group”), along with its very strong business profile and intermediate financial profile. In addition, Santam’s ratings derive upliftment from implied support from the Sanlam Limited group. The insurer’s credit profile is expected to be sustained over the outlook horizon, with continued earnings strength expected to support stability in liquidity and capitalisation. The national scale long-term issuer credit rating is one notch lower than the financial strength rating, because GCR views policyholder obligations to be senior to those of senior unsecured creditors. The ratings on the notes reflect the subordinated status and the mandatory deferability of the notes (if there is a Regulatory Deficiency Redemption or Interest Deferral Event).
Santam’s competitive position is viewed to be very strong, given its market leadership position in the South African short term insurance industry. Santam had a 21% share of industry gross premiums in FY18, equating to 14x the industry average. Revenue scale and stability are viewed to be sound, with the group reflecting consistency in premium growth over the review period. GCR expects Santam’s competitive position to continue to be supported by its franchise strength and multi-channel delivery structure. Furthermore, the group is viewed to derive strategic benefits from access to business through multiple differentiated insurance licences.
The business profile assessment considered the high level of premium diversification, which has translated into observed cross subsidisation between divisions and lines of business. Despite relative concentration to motor and property, GCR viewed large scale in ancillary lines and the insurer’s strong position in three specialist classes to contribute favourably to the insurer’s business profile. Geographic diversification is fairly limited in a global context, with 17% of business derived from outside South Africa in FY18. In this respect, successful execution of the group’s geographic expansion strategy may contribute to further positive development in GCR’s assessment of Santam’s business profile.
Santam reflects strong earnings and demonstrated cross cycle resilience, which has been sustained despite challenging domestic economic conditions. The group’s five year average underwriting margin equated to 7% in FY18 (1H F19: 5%), while the corresponding return on net earned premiums registered at 10% (1H F19: 10%), with both metrics reflecting low volatility. GCR expects earnings strength and stability to remain a key positive rating factor, supported by a well-managed net incurred loss ratio and scale efficiencies.
Capitalisation is viewed to be intermediate, with the group targeting a comparatively thin minimum buffer above the regulatory capital requirement. Nevertheless, strong capital management is expected to support consistency in risk based capitalisation at the group and underlying insurance subsidiaries. GCR also views Santam to benefit from financial flexibility in the form of access to debt markets, with the insurer reflecting very low leverage and high interest coverage.
Liquidity is intermediate, based on GCR’s assessment of stressed financial asset coverage of technical liabilities and underwriting expenses. Liquidity is expected to remain at similar levels going forward, given sound operational cash flow generation and a consistent asset-liability matching approach.
Santam’s ratings derive upliftment from implied parental support, given its relevance to the Sanlam Limited group, history of performance, and contribution towards group earnings diversification.
The Stable Outlook reflects the expectation that Santam will maintain its very strong competitive position, while earnings strength and stability and sound capital management will support consistency in risk adjusted capitalisation and liquidity.
The national scale rating is at the rating ceiling. Downward rating action could follow if capitalisation and liquidity reduce below targeted levels. The international scale rating could move up or down if there is a change in GCR’s assessment of country risk in South Africa.
|Primary analyst||Susan Hawthorne||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||Susanh@GCRratings.com||+27 11 784 1771|
|Committee chair||Yvonne Mujuru||Sector Head: Insurance Ratings|
|Johannesburg, ZA||YMujuru@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|
|Rated Entity / Issue||Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Santam Limited||Claims paying ability||Initial||National||AAA(ZA)||Stable Outlook||May 2009|
|Last||National||AAA(ZA)||Stable Outlook||August 2018|
|Claims paying ability||Initial||International||A-||Stable Outlook||July 2013|
|Last||International||BB+||Stable Outlook||August 2018|
|Long term issuer||Initial/last||National||AA+(ZA)||Stable Outlook||November 2019|
|Long term issue*||Initial||National||AA-(ZA)||Stable Outlook||June 2009|
|Last||National||AA-(ZA)||Stable Outlook||August 2018|
|SNT02, SNT03, SNT04*||Long term issue||Initial/ last||National||AA-(ZA)||Stable Outlook||November 2019|
Risk Score Summary
|Country risk score||7.00|
|Sector risk score||8.25|
|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.|
|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.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|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.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|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.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to Santam Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Santam 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 Santam Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 December 2018
- Four years of comparative audited numbers
- Unaudited interim results to 30 June 2019
- Budgeted financial statements for 2019
- The current reinsurance programme summary
- Other related documents.