Fitch Ratings has affirmed Kenya-based Sanlam Life Insurance Limited's (Sanlam Life) Insurer Financial Strength (IFS) Rating and Issuer Default Rating (IDR) at 'B' and its holding company Sanlam Kenya plc's (Sanlam Kenya) IDR at 'B-'.
Fitch has simultaneously affirmed Sanlam Life's National IFS Rating and National Long-Term Rating at 'AA-(ken)' and Sanlam Kenya's National Long-Term Rating at 'A+(ken)'.
The ratings have been removed from Rating Watch Negative (RWN) and assigned Stable Outlooks, following Fitch's analysis of Sanlam Kenya's credit profile in light of the group's 2021 results and subsequent credit developments. This mainly reflects our expectation of financial support from South Africa-based Sanlam Limited (Sanlam; National Long-Term Rating 'AA+(zaf)'/Stable), but also a stabalisation of Sanlam Kenya's standalone credit quality, albeit at a weaker level, as remedial management actions take effect.
Fitch has revised Sanlam Kenya's standalone credit quality assessment to 'ccc+' from 'b-', reflecting a significant deterioration in the financial performance and capitalisation of the group's non-life business. Sanlam Kenya's standalone credit quality also considers a moderate business profile and the group's significant investment exposure to the Kenyan sovereign (B+/Negative).
Key Rating Drivers
Important to Sanlam: Fitch assigns an uplift of two notches from Sanlam Kenya's 'ccc+' standalone credit quality due to its ownership by Sanlam. The agency assesses Sanlam Kenya as strategically 'Important' to its parent, driven by the two groups' shared branding and Sanlam Kenya's key role in the Sanlam group's pan-African strategy, given Kenya's position as a financial hub in east Africa. The assessment also benefits from the Sanlam group's guarantee of Sanlam Kenya's external debt and was further strengthened by a recent debt capital infusion of KES1.1 billion into its non-life subsidiary in May 2022.
Weaker Standalone Assessment Driven by Losses: Sanlam Kenya reported a group net loss of KES288 million in 1H22 (2021: loss of KES542 million), resulting in a Fitch-calculated annualised return on equity of -113% (2021: -54%) due to persistent losses in its non-life business, which has also significantly weakened the group's equity capital base. The group's non-life loss ratio fell to 85% in 2021 from 57%, driven mainly by increased claims in its health and motor insurance lines and the resultant strengthening in insurance reserves. The non-life result was only partly offset by a satisfactory performance at Sanlam Life.
Significant non-life losses caused the non-life solvency ratio to remain below the regulatory minimum of 100% at end-2021 on a pro-forma basis, when including the KES1.1 billion debt capital raised in 1H22. The non-life company has since realigned pricing in some products and cut some loss-making lines. However, Sanlam Life's solvency ratio was 192% at end-2021.
Weak Capitalisation: Sanlam Kenya's consolidated equity base deteriorated to KES308 million at end-1H22 from KES596 million at end-2021 driven by losses. The group's equity base at end-2020 was KES1.1 billion, restated from KES1.7 billion following adjustments relating to bad debt provisions of counterparty receivables and accounting errors related to expenses. Sanlam Kenya's score on Fitch's Prism Factor-Based Capital Model (Prism FBM) remained 'Weak' at end-2021 and we expect the score to remain at this level over the next two years.
Financial Leverage Weak: Sanlam Kenya's Fitch-calculated financial leverage ratio (FLR) was weak at 93% at end-1H22, up from an already elevated 83% at end-2021. This ratio is driven by debt that has a guarantee from Sanlam.
Moderate Company Profile: Fitch's assessment of the group's company profile is driven by a strong market position as one of the top-five life insurers and a modest non-life market position. The group also has good diversification across both life and non-life products. Life insurance premium made up 61% of total written premium in 2021 with a healthy split across term assurance, annuities and pension business. Similar to peers, motor insurance made up the bulk of non-life premiums at 50%, split across personal and commercial lines. These strengths are partly offset by its relatively smaller operating scale compared with the leading Kenyan insurers.
National Ratings Driven by Mapping: Sanlam Kenya's National Ratings are derived by mapping operating company Sanlam Life's IDR to the National Long-Term Rating using Fitch's Kenyan National Ratings Correspondence Table. The mapping applied to Sanlam Kenya also considers its strategic importance to the Sanlam Group, and Sanlam Kenya's moderate company profile.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade of Sanlam Kenya's National and International ratings:
A sustained breach in the regulatory minimum non-life solvency ratio, leading to a severely restrictive regulatory intervention, for example, a suspension of license to operate.
A further material restatement in the group's financial statements pointing to structural governance shortcomings.
A weakening in Fitch's assessment of the willingness and ability of the parent, Sanlam Limited, to support Sanlam Kenya, as evident by a weakening in our assessment of the strategic importance of Sanlam Kenya, or a weakening in our assessment of the credit quality of Sanlam Limited.
Factors that could, individually or collectively, lead to positive rating action/upgrade of Sanlam Kenya's National and International ratings:
A strengthening in Fitch's assessment of the willingness and ability of the parent, Sanlam Limited, to support Sanlam Kenya, as evident by an improvement in our assessment of the strategic importance of Sanlam Kenya.
Sustained improvement in Sanlam Kenya's standalone credit quality, as evident by the non-life insurer returning to underwriting profitability while meeting the regulatory minimum non-life solvency ratio.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
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.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
SANLAM KENYA PLC 
