Fitch Ratings: Santam’s Ratings Unaffected by Business Interruption Ruling

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Fitch Ratings: Santam’s Ratings Unaffected by Business Interruption Ruling
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(The following statement was released by the rating agency) Fitch Ratings-London-02 December 2020: The recent South African High Court judgement in favour of contingent business interruption (CBI) policyholders will likely not affect Santam Ltd's ratings (National Insurer Financial Strength (IFS): AAA(zaf)/Stable), Fitch Ratings says. A rise in CBI-related net claims liabilities, although material, does not result in a breach of the rating sensitivities of the Sanlam (JO: SLMJ ) Limited group (National IFS: AAA(zaf)/Stable) – of which Santam is a subsidiary. We assume that, where claims are determined to be legally valid, Santam will have recourse to reinsurance protection, thereby mitigating the risk of ballooning claims provisions. The Western Cape High Court judgement determined that the indemnity period applicable to the CBI infectious disease extensions covered a significantly longer period than Santam had believed. This could set a precedent on similar policies written by Santam – even those not included in the ruling. Following the court's ruling on policy wording, Santam increased its net CBI claims provisions by ZAR1.7 billion (USD111 million), in addition to the ZAR1.3 billion set aside in June 2020. Business interruption insurance is primarily designed to cover losses from business interruption due to property damage. Other causes, such as infectious diseases, are typically specifically excluded unless otherwise covered under an extension to the policy. However, interpretation is sensitive to the precise policy wording which, given the complexity of the products, may vary by client. The court judgement above draws on similar cases, such as the UK High Court judgement on UK business interruption claims, which is undergoing an appeals process. Given the legal uncertainty around these cases until appeals processes are completed, it is not clear to what extent this ruling sets a wider precedent for the South African insurance sector. A further substantial increase in Santam's CBI claims provisions would negatively affect our assessment of the group's capitalisation, and could be credit-negative for the Sanlam group. We assess Sanlam and Santam using a group consolidated approach and consider Santam to be ‘core' to Sanlam. As such, the ratings are aligned and any negative action taken on the group's ratings would be followed by similar rating action on Santam's ratings. According to Santam, the group's economic capital coverage ratio as at 31 October 2020, including the additional net CBI claims provisions of ZAR1.7 billion, was already at the bottom end of its target range of 150% to 170%. Santam is seeking to appeal the judgment, and it could take many months for a final ruling. Contact: Eugene McGeown Associate Director +44 20 3530 1767 Fitch Ratings Limited 30 North Colonnade London E14 5GN Willem Loots Senior Director +44 20 3530 1808 Media Relations: Athos Larkou, London, Tel: +44 20 3530 1549, Email: athos.larkou@thefitchgroup.com Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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