Fitch Affirms Sanlam Life & Santam at IFS 'AAA(zaf)'; Outlook Stable

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Fitch Affirms Sanlam Life & Santam at IFS 'AAA(zaf)'; Outlook Stable
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(The following statement was released by the rating agency) Fitch Ratings-London-02 October 2020: Fitch Ratings has affirmed Sanlam (JO: SLMJ ) Life Insurance Limited's (Sanlam Life), Sanlam Developing Markets Limited's (SDM) and Santam Limited's (Santam) National Insurer Financial Strength (IFS) Ratings at 'AAA(zaf)'. Fitch has also affirmed Sanlam Life's parent and the ultimate holding company of the Sanlam group, Sanlam Limited's (Sanlam) National Long-Term rating at 'AA+(zaf)'. The Outlooks are Stable. Key Rating Drivers The affirmations reflect the Sanlam group's strong business profile, and very strong capitalisation and operating performance. Fitch assesses Sanlam's business profile as 'Most Favourable' compared with other South African-based life insurance companies'. Sanlam is the leading pan-African financial services provider. Sanlam's primary life insurance operating subsidiary, Sanlam Life, remains South Africa's second-largest life insurance group by total assets in 2019; and Santam, the group's majority-owned non-life subsidiary, is the largest general insurer in South Africa. Fitch's assessment of Sanlam's business profile reflects the group's well-established business and strong brand in South Africa, as well as diversification across business lines and distribution channels. The group offers a complete range of life and savings products through Sanlam Life, and all classes of non-life business through Santam. Fitch views the group's geographical diversification through Sanlam Emerging Markets (SEM) as supportive of the rating. Sanlam is active across Africa and the SEM business unit contributed 27% to Sanlam's operating profit in 2019. Sanlam's capital position has deteriorated somewhat due to the impact of the coronavirus pandemic in 1H20. Sanlam's statutory solvency assessment and management (SAM) cover ratio declined to 187% at end-1H20 from 211% at end-2019 (2018: 215%; 2017: 218%). This was driven by negative investment variances and economic assumptions changes and around ZAR7.6 billion of impairments related to reduced valuations of SEM businesses, including Saham,the Morrocan-based insurance business acquired in 2018. Sanlam scored 'Strong' at end-2019 under Fitch's Prism factor-based capital model (Prism FBM), unchanged from 2018. The company's Prism score weakened in 1H20 due to the impact from the coronavirus pandemic, but remained in the 'Strong' category on a pro-forma basis. Sanlam's Prism score is driven by high investment risk charges, due to the company's portfolio of equities and non-investment grade bonds. This has been exacerbated by negative pressure on South Africa's sovereign rating and on South African-based credits. Sanlam's financial leverage ratio (FLR) deteriorated to 9% at end-2019 (end-2018: 4%), due to new issuance of ZAR2.4 billion dated preference shares and a ZAR1.2 billion collar loan. The issuance funded the group's latest broad-based black economic empowerment (B-BBEE) initiatives in 2019. However, Sanlam's FLR remains well within Fitch's guidelines for the ratings. Sanlam's operating performance weakened in 1H20 due to the impact of the coronavirus on both business volumes and investment-market volatility. The group's net result from financial services (the group's main operating profit measure) declined 22% to ZAR3.9 billion in 1H20. This was due to weak performance of the SEM unit (28% decline) and mark-to-market losses driving a 77% decline in the Sanlam Investment Group net result from financial services. The group estimates its underlying profitability to have improved 18% excluding the impact of COVID-19. Fitch expects Sanlam's performance to return to the strong levels seen in previous years in 2021. Santam's results were significantly impacted by provisions for COVID-19 related business interruption (BI) claims. Total claims expenses related to BI were ZAR581 million in 1H20. This was offset somewhat by an improvement in the motor underwriting result of ZAR206 million to yield a net loss for Santam from COVID-19 of around ZAR375 million. Fitch believes this to be a manageable loss for Santam. Sanlam has a high level of risky assets relative to shareholders equity compared with international insurers. This is due mainly to its exposure to interest-bearing investments linked to the South African sovereign rating (BB/Negative), and equity investments. However, we view Sanlam's investment strategy as conservative when evaluated against domestic peers. Sanlam's ratings reflect Fitch's assessment of the impact of the coronavirus pandemic, including its economic impact, under a set of rating assumptions. Under our rating-case assumptions, Sanlam's credit fundamentals are strong and commensurate with the group's IFS Rating. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: --An adverse change in Fitch's rating assumptions with respect to the coronavirus impact could lead to a downgrade. --A substantial increase in the group's provisions for coronavirus-related BI claims. --Substantial and sustained deterioration in capitalisation in terms of Fitch's Prism score, or as evidenced by a decline in Sanlam's SAM cover ratio to below 170%. --Sustained weak operating performance or a severe weakening in business profile. --A downgrade of Santam's ratings could be triggered by deterioration in Santam's standalone profile to an extent that Fitch no longer considers Santam as core to Sanlam. This could result from a sustained weak operating performance or a severe weakening in Santam's business profile. Factors that could, individually or collectively, lead to positive rating action/upgrade: As the ratings are 'AAA(zaf)', which is the highest level on Fitch's scale, they cannot be upgraded. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. Sanlam Limited; National Long Term Rating; Affirmed; AA+(zaf); Rating Outlook Stable Sanlam Developing Markets Limited; National Long Term Rating; Affirmed; AAA(zaf); Rating Outlook Stable ; National Insurer Financial Strength; Affirmed; AAA(zaf); Rating Outlook Stable Santam Ltd; National Long Term Rating; Affirmed; AAA(zaf); Rating Outlook Stable ; National Insurer Financial Strength; Affirmed; AAA(zaf); Rating Outlook Stable Sanlam Life Insurance Limited; National Long Term Rating; Affirmed; AAA(zaf); Rating Outlook Stable ; National Short Term Rating; Affirmed; F1+(zaf) ; National Insurer Financial Strength; Affirmed; AAA(zaf); Rating Outlook Stable Contacts: Primary Rating Analyst Eugene McGeown, Associate Director +44 20 3530 1767 Fitch Ratings Ltd 30 North Colonnade, Canary Wharf London E14 5GN Secondary Rating Analyst Willem Loots, FIA Senior Director +44 20 3530 1808 Committee Chairperson Stephan Kalb, Senior Director +49 69 768076 118 Media Relations: Athos Larkou, London, Tel: +44 20 3530 1549, Email: Additional information is available on The following issuer(s) did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure: Sanlam Limited Santam Ltd Sanlam Life Insurance Limited Sanlam Developing Markets Limited Applicable Criteria Insurance Rating Criteria (pub. 25 Aug 2020) (including rating assumption sensitivity) ( National Scale Rating Criteria (pub. 08 Jun 2020) ( Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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