Fitch Ratings has affirmed Sanlam 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. A full list of rating actions is below.

Key Rating Drivers

Strong Company Profile: Fitch assesses Sanlam's business profile as 'most favourable' compared with other South African insurers. We view Sanlam as the leading pan-African financial services provider. Sanlam's primary life insurance operating subsidiary, Sanlam Life, remains one of the largest life insurance groups in South Africa by total assets and Santam, the group's majority-owned non-life subsidiary, is the largest general insurer in South Africa.

Allianz Partnership Supports Expansion: In our view, Sanlam's proposed joint-venture with Allianz SE (IFS Rating: AA/Stable), which will combine their operations across 29 African markets outside South Africa, supports Sanlam's position as the largest African insurance group. We expect the partnership to gradually generate meaningful operational synergies and economies of scale over the medium term, although the near-term impact of the deal will likely be neutral to Sanlam's credit profile, with limited scale benefits and synergies realised over the first year.

Strong Capitalisation and Leverage: Fitch assesses Sanlam's capitalisation as strong, reflected by its 'Strong' score on Fitch's Prism Factor-Based Capital Model (Prism FBM), at end-2021 and 2020. Sanlam's Prism FBM 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 rating actions on South African issuers over the past years.

Sanlam's statutory solvency assessment and management (SAM) cover ratio for the group was 174% at end-1H22, broadly stable against the 173% reported at end-2021. Sanlam's financial leverage ratio (FLR) was 11% at end-2021 (2020: 11%), which we view as very strong. Sanlam's low leverage was despite net debt issuances 2021, principally supported by strong growth in equity capital. Fitch estimates the group's FLR to have marginally increased on a pro-forma basis to 12% at end-1H22 due to a reduction in shareholder equity. However, Sanlam's FLR remains well within our guidelines for the ratings and is supportive of our assessment of capitalisation and leverage.

Group Earnings Remain Strong: Sanlam's operating performance remained resilient in 1H22, supported by strong operating performance in its life business due to the normalising mortality claims but offset by weaker non-life performance. The group's net result from financial services (the group's main operating profit measure) improved marginally by 1% yoy to ZAR4.6 billion in 1H22. Net result from life insurance business increased by 23% yoy, while non-life was down 57%.

Weaker Santam Profits: Results at the group's non-life business Santam weakened considerably in 1H22, mainly due to claims from the floods in the KwaZulu-Natal province (KZN) in April 2022. Higher claims from this event were partially offset by ZAR397 million release of contingent business interruption claims provisions in 1H21 (2021: ZAR450 million release). Santam Group's Fitch-calculated combined ratio weakened to 97% in 1H22 from 93% in 1H21 (2021: 91%).

Strong Reinsurance at Santam: The KZN flood event was South Africa's largest catastrophe loss event on record. However, owing to reinsurance, Santam limited its net loss at ZAR566 million compared with a gross loss of ZAR4.4 billion. This is in line with Santam's consistent and long-standing record of utilising reinsurance to significantly mitigate large exposures.

High Exposure to Risky Assets: Sanlam has a high level of risky assets to shareholders' equity compared with international insurers. This is mainly due to its exposure to interest-bearing investments linked to South Africa (Issuer Default Rating (IDR): BB-/Stable) and equity investments. However, we view Sanlam's investment strategy as conservative when evaluated on a domestic basis.

Core Group Entities: Fitch assesses Sanlam Life, SDM and Santam as 'core' to the Sanlam group under its insurance group rating methodology. Sanlam Life and SDM are fully integrated within the Sanlam group. Santam shares the group's strategy, including providing essential support to the group's emerging markets expansion.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The ratings are 'AAA(zaf)', which is the highest level on Fitch's scale and cannot be upgraded.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Substantial and sustained deterioration in capitalisation in terms of Fitch's Prism FBM score, or a decline in Sanlam's SAM cover ratio to below 160%.

Sustained weak operating performance or severe weakening in company 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 severe weakening in Santam's company profile.

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

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