Global Credit Ratings affirms Santam top rating

24 August 2010 Global Credit Ratings,

Claims paying ability at AAA
Long term subordinated debt at AA-

Global Credit Ratings said today that it had affirmed the domestic currency AAA claims paying ability rating and domestic currency AA- long term subordinated debt rating for Santam Limited (“Santam”), the largest player in the South African short term insurance market.

According to Susan Andrews, insurance analyst at GCR, cognisance was taken of Santam’s number one position in the short term insurance market, which GCR considers to be sustainable in view of the company’s substantial underwriting capacity, established broker relationships and strong brand. Furthermore, Santam’s scientific pricing model and enhanced scale efficiencies have supported a favourable underwriting margin, which has averaged 5% through the industry downturn over the past five years, versus approximately 3% for its large competitors.

Santam’s total capital (including tier-II capital) amounted to R5.8bn at FYE09, supporting an international solvency margin of 48%, which was comfortably above the internally calculated economic risk capital requirement. In this regard, cognisance was taken of the company’s robust risk management framework and relatively mature internal capital model, which is used to guide its risk appetite and capital management. Management has indicated that solvency will be maintained at a level supportive of the current ratings, based on GCR’s internal capital adequacy model. Further comfort was provided by Santam’s large and diversified investment portfolio and adequate liquidity, as well as its prudent reserving approach.

Andrews commented that the investment risk profile is expected to remain relatively stable, while Santam will continue to use derivative instruments to protect against downside equity market risk on a tactical basis.

The proceeds of the debt issue have been matched with a ring fenced portfolio of fixed income investments, and the company uses interest rate swaps to hedge interest rate risk. GCR’s AA- subordinated debt rating was further supported by the low level of gearing and strong operating cash flow coverage.

Andrews did raise concern about the systemic challenges in the motor and property classes, which are likely to constrain industry underwriting margins in the medium term. Santam has, however, implemented corrective measures, including the review of under-performing personal lines portfolios, improvements in claims management and a reduction in corporate property risk retention. Moreover, the acquisition of Emerald Risk Transfer (“ERT”) and transfer of Santam’s corporate portfolio to ERT in January 2010 was favourably viewed, given the potential for enhanced economies of scale and a greater degree of specialisation. GCR is of the opinion that these corrective measures and a further improvement in cost efficiencies should support a strengthening in underwriting profitability in the near term.

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