Nairobi, 12 November 2020 – GCR Ratings (“GCR”) has downgraded Sanlam Life Insurance Limited’s (“Sanlam Life Kenya”) national scale financial strength rating to A(KE), from AA-(KE), with the Outlook maintained as Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Sanlam Life Insurance Limited||Financial strength||National||A(KE)||Negative Outlook|
Sanlam Life Kenya’s national scale financial strength rating reflects the credit profile of Sanlam Kenya Plc (“the group”), which has exhibited sustained weakness in risk adjusted capitalisation leading to the rating downgrade. Sanlam Life Kenya is the group’s core operating entity contributing 63% and 87% of gross premiums and assets respectively at FY19. While, Sanlam Life Kenya registered strong statutory solvency of 168% at FY19 (FY18:103%) and showed further improvement to 217% at 1H F20, largely backed by capital of KES643m injected in FY18, sale of investment properties and a review year increase in retained earnings, the group’s risk adjusted capitalisation measured at a depressed level. This was due to the partial execution of the capitalisation plan presented by management failing to substantially lift group capital adequacy to rating adequate levels. In GCR’s view, the group’s GCR capital adequacy requirement (“CAR”) ratio is likely to be consistent with a lower rating range over the medium term, underpinning the Negative Outlook.
The group’s risk adjusted capital has been on a downward trend over the past three years as a result of a significant reduction in the capital base from KES4.1bn at FY17 to KES1.7bn at FY19. Consequently, the GCR CAR moderated to 0.7x from 1.3x at FY17, corresponding with a lower rating range. Going forward, capitalisation is sensitive to execution risks in capital remediation measures proposed, including risks from financial leverage posed by the shareholder loan and refinancing plans when the loan matures at the end of FY20.
The group’s earnings are assessed to be intermediate. Note is taken of an improvement in the operating profit supported by healthier investment income in FY19. In this regard, the five-year operating margin equated to 4%. This was mainly driven by an improvement in the core operating entity’s earnings whose five-year operating margin registered at a higher 5.6% (FY18: 4.0%), sustaining its performance in the current year. GCR expects the group’s earnings to moderate slightly, given the negative impact of the weak economic environment and COVID-19 pandemic on investment returns, albeit likely to be maintained within the same range.
Liquidity is viewed to be neutral to the rating, underpinned by a conservative asset allocation and a shift in the liability portfolio toward investment contracts. Sanlam Life Kenya’s asset liability matching is considered fairly sound, supported by recent disposals of investment properties and placement of proceeds in government securities, with the maturities and returns on assets more closely matched with the profile of policyholder liabilities, especially given more emphasis on products that allow for increased risk sharing with policyholders. In this respect, cash and stressed financial assets coverage of net technical obligations improved to around 1.3x at FY19. GCR expects liquidity metrics to be maintained within similar levels over the rating horizon.
Premium diversification is viewed to be intermediate, with the core operating entity’s well-diversified portfolio of investment and insurance products offsetting the short-term business’ limited scale and diversification. Furthermore, the group’s policyholders and distribution channels are viewed to be well diversified. The competitive position assessment is neutral, with the group’s weighted market share and relative market share measuring at 5.6% (FY18: 6.3%) and 1.5x (FY18: 1.5x) respectively in FY19, balancing Sanlam Life Kenya’s strong market share with Sanlam General Kenya’s relatively limited premium scale.
The rating derives support from Sanlam group (ultimate parent based in South Africa) through Sanlam Pan Africa, given history of financial support, strategic and operational integration, as well as brand alignment.
The Negative Outlook reflects potential for risk adjusted capitalisation to remain below rating adequate levels in the absence of effective remedial measures, resulting in the group’s GCR CAR being sustained below 1x. Furthermore, there is potential for the group loan to be refinanced at less favourable terms, given the flexibility currently offered by the shareholder. Furthermore, earnings generation may underperform management’s expectations, due to the likely adverse impact of COVID-19 pandemic related risks on persistency of premiums, as well as investment income.
The rating may be downgraded should the insurer evidence continued weakness in risk adjusted capital adequacy, and/or a weakening in earnings below expectations. Conversely, positive rating action may stem from a sustainable improvement in capitalisation and earnings while all other credit protection metrics remain within similar ranges.
|Primary analyst||David Mburu||Analyst: Insurance Ratings|
|Nairobi, KE||DavidM@GCRratings.com||+254 20 367 3618|
|Secondary 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||GodfreyCGCRratings.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 Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(KE)||Stable||November 2009|
|Financial strength||Last||National||AA-(KE)||Negative||December 2019|
Risk score summary
|Rating components and factors||Risk scores|
|Country risk score||4.00|
|Sector risk score||4.25|
|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.
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.