Announcements Insurance Rating Alerts

GCR affirms Santam’s national and international scale financial strength ratings of AAA(ZA), and BB+ respectively, Outlook Stable

Rating Action

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
SNT03 AA-(ZA) Stable Outlook
SNT04 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’.

Rating Rationale

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.

Outlook Statement

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.

Rating Triggers

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.

Analytical Contacts

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

Ratings History

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

*Ratings were not accorded to individual notes prior to November 2019.

Risk Score Summary

Risk score
Operating environment 15.25
Country risk score 7.00
Sector risk score 8.25
Business Profile 3.25
Competitive position 1.50
Premium diversification 1.75
Management and governance 0.00
Financial profile 0.00
Earnings 1.00
Capitalisation 0.00
Liquidity -1.00
Comparative profile 1.00
Group support 1.00
Peer analysis 0.00
Total Score 19.50

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.
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.
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