Nairobi, 18th October 2021 – GCR Ratings (“GCR”) has downgraded Sanlam Life Insurance Limited’s (“Sanlam Life Kenya”) national scale financial strength rating to BBB(KE), from A(KE); Stable Outlook. Subsequently, the rating has been withdrawn due to business reasons. Accordingly, GCR will no longer provide coverage on the issuer.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Sanlam Life Insurance Limited||Financial strength||National||WD||–|
Sanlam Life Kenya’s rating reflects the strengths and weaknesses of Sanlam Kenya Plc (“the group”), being the core operating entity of the group. The rating downgrade follows the group’s sustained low risk adjusted capitalisation metrics, which continue to measure below 1x, following limited internal capital generation. We expect the group’s GCR capital adequacy ratio (“CAR”) to remain within a similarly low range until the capitalisation plan is successfully executed, as other credit protection metrics are sustained at similar levels.
The group’s capital base continued measuring at very low levels, due to increasing earnings pressure. As a result, the GCR CAR for the group registered at around 0.5x over the last three years and is expected to remain below 1x over the near term. On a positive note, the group’s subsidiaries met the minimum statutory capital adequacy requirement at FY20 with Sanlam Life Kenya and Sanlam General Insurance Limited (“Sanlam General Kenya”) registering a statutory CAR of 221% and 133% respectively.
Over the review period, earnings have been intermediate, although reflecting increasing pressure at net level due to high finance related costs. During FY20, positive operating performance was supported by improved cost efficiencies, although equity write downs resulted in a softening in the operating margin to 6.1% (FY19: 9.9%). Net profitability was moderated by higher finance costs resulting from foreign exchange revaluation of the shareholder loan (increasing finance costs by about KES213.6m). Consequently, the return on revenue moderated to -1.1% (FY19: 2.0%). Over the near-term, we expect net earnings margins to remain subdued (in the range between 1% to -7%) due to high claims and finance costs, as well as increased taxes. This may offset increased investment income following the change in asset allocation in favour of government securities.
Liquidity was sustained at similar levels, underpinned by positive cash flow generation. As such, cash and stressed assets coverage of net technical liabilities was sustained at 1.2x while the operational cash coverage was also maintained at around 25 months. In the near-term, liquidity metrics are expected to remain within similar bands, reinforced by the growing government bond investments.
The group’s market position was supported by growth in the single premium annuities and motor book. As such, Sanlam Life Kenya’s market share and relative market share (excluding pension and unit linked business) registered at 7.8% (FY19: 6.6%) and 1.8x (FY19: 1.5x) while Sanlam General Kenya’s market and relative market share improved to 3.1% (FY19: 2.2%) and 1.1x (FY19: 0.8x) respectively. The group is well diversified with four lines of business contributing materially to total gross premiums. In addition, Sanlam Life Kenya’s products include the deposit administration and unit linked business that contributed about 23.8% (FY19: 18.5%) of the subsidiary’s annual income and contributions. The group’s business profile is expected to be sustained in the near-term.
The rating derives support from Sanlam Limited (ultimate parent based in South Africa) through Sanlam Emerging Markets, given history of financial support, strategic and operational integration, as well as brand alignment.
The Stable Outlook reflects our expectations that the group’s risk adjusted capitalisation will remain within a similar range, despite some potential compression due to continued earnings pressure. No material changes are expected in the group’s business profile.
|Primary analyst||David Mungai||Analyst: Insurance Ratings|
|Nairobi, KE||DavidM@GCRratings.com||+254 73 218 8669|
|Committee chair||Susan Hawthorne||Senior Analyst: Insurance ratings|
|Johannesburg, ZA||SusanH@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|
Sanlam Life Insurance Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Claims paying ability||Initial||National||A+(KE)||Stable Outlook||November 2009|
|Financial strength||Last||National||A(KE)||Negative Outlook||November 2020|
Risk score summary
|Rating Components and Factors||Risk score|
|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.|
|Property||Movable or immovable asset.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Real Estate||Property that consists of land and / or buildings.|
|Receivables||Any outstanding debts, current or not, due to be paid to a company in cash.|
|Recovery||The action or process of regaining possession or control of something lost. To recoup losses.|
|Repayment||Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt.|
|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.|
|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.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|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.|
|Valuation||An assessment of the property value, with the value being compared to similar properties in the area.|
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 rating is based solely on the merits of 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 above 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 rated entity and other reliable third parties to accord the credit rating included:
- Audited group and company financial results as at 31 December 2020;
- Four years of comparative group and company audited financial statements to 31 December.
- Full year group and company budgeted financial statements for 2021.
- Unaudited group and company interim results to 30 June 2021.
- Company valuation and FCR reports as at 31 December 2020
- Company reinsurance cover notes for 2021; and
- Other relevant documents.