Announcements Insurance Rating Alerts

GCR revises Santam Limited’s Outlook to Negative on rising operating environment risks

Rating action

Johannesburg, 12 August 2020 – GCR Ratings (“GCR”) has affirmed Santam Limited’s (“Santam”) international and national scale financial strength ratings of BB+ and AAA(ZA) respectively, with the ratings placed on Negative Outlook. At the same time, GCR has affirmed Santam’s national scale long term issuer rating of AA+(ZA), with a Negative Outlook and 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 Negative Outlooks.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Santam Limited Financial strength International BB+ Negative Outlook
Financial strength National AAA(ZA) Negative Outlook
Long term issuer National AA+(ZA) Negative Outlook
SNT02 Long term issue National AA-(ZA) Negative Outlook
SNT03 AA-(ZA) Negative Outlook
SNT04 AA-(ZA) Negative Outlook

The rating action follows a reduction in the South African country and insurance sector risk assessments.

The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on the 27th May 2020. Click here to access the link. On 4th June 2020, the South African Insurance sector risk score was also lowered to 8.0 from 8.75 previously. Click here to access link.

Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.

Rating rationale

The Negative Outlook reflects risks emanating from the strained operating environment, most specifically the potential reduction in the financial profile of Santam and its subsidiaries (collectively, Santam) in the wake of the ongoing
COVID-19 pandemic.

The ratings continue to be supported by a very strong competitive position, with approximately 23% of total short-term insurance industry GWP in FY19, and high levels of business and geographic premium diversification. We do not anticipate these factors to change over the medium to long term. Conversely, Santam’s financial profile is a slight rating negative, balancing tight but well managed capitalisation, strong earnings and intermediate liquidity. The Negative Outlook reflects the potential reduction in all of the financial profile factors, at least over the short term, due to the strained operating environment.

Santam’s ratings also benefit from implied parental support, given the insurer’s relevance to the Sanlam Limited group, history of performance, and contribution towards group earnings diversification.

The negative one notch spread on the national scale long-term issuer credit rating reflects the regulatory subordination of senior unsecured creditors to policy holders. A further negative two notch spread on the notes reflects the subordinated status and mandatory deferability of the notes (if there is a Regulatory Deficiency Redemption or Interest Deferral Event).

Outlook statement

The Negative Outlook reflects the potential reduction in the financial profile, due to the strain emanating from the operating environment.

Rating triggers

The Outlook could revert to Stable if earnings capacity measures in line with expectations, while capitalisation and liquidity remain within the current range. We could lower the ratings if FY20 earnings significantly underperform expectations and potential recovery over the medium term is materially lower than anticipated. Furthermore, if Solvency Capital Requirement and/ or liquidity coverage ratios reduce below 1x the ratings could be downgraded.

Analytical contacts

Primary analyst Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@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, May 2020
GCR Insurance Sector Risk Scores, July 2020

Ratings history

Rated Entity / Issue Rating class Review Rating scale Rating Outlook/Watch Date
Santam Limited Financial strength* Initial National AAA(ZA) Stable Outlook May 2009
Last National AAA(ZA) Stable Outlook November 2019
Financial strength* Initial International A- Stable Outlook July 2013
Last International BB+ Stable Outlook November 2019
Long term issuer Initial/last National AA+(ZA) Stable Outlook November 2019
SNT02** Long term issue Initial/ last National AA-(ZA) Stable Outlook November 2019
SNT03** Long term issue Initial/ last National AA-(ZA) Stable Outlook November 2019
SNT04** Long term issue Initial/ last National AA-(ZA) Stable Outlook November 2019

*Formerly claims paying ability.

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

Risk score summary

Rating components and factors Risk score
Operating environment 14.00
Country risk score 6.50
Sector risk score 7.50
Business profile 3.25
Competitive position 1.50
Premium diversification 1.75
Management and governance 0.00
Financial profile (0.25)
Earnings 0.75
Capitalisation 0.00
Liquidity (1.00)
Comparative profile 1.00
Group support 1.00
Peer analysis 0.00
Total score 18.00

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 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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to the rated entity. 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. 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 Santam Limited and other reliable third parties to accord the credit ratings included:

  • The audited financial results to 31 December 2019;
  • Four years of comparative audited numbers;
  • Unaudited interim results to 31 May 2020;
  • Budgeted financial statements for 2020;
  • Santam group and company Own Risk and Solvency Assessment Report to 31 December 2019;
  • Santam Solo Statutory return to 30 June 2020; and
  • Other related documents.
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