OREANDA-NEWS. Fitch Ratings has upgraded Sanlam Life Insurance Limited's (Sanlam Life), Sanlam Developing Markets Limited's (SDM) and Santam Limited's National Insurer Financial Strength (IFS) ratings to 'AAA(zaf)' from 'AA+(zaf)'. Fitch has also upgraded Sanlam Life's parent and the ultimate holding company of the Sanlam group, Sanlam Limited's (Sanlam) National Long-Term rating to 'AA+(zaf)' from 'AA-(zaf)'. The Outlooks are Stable.

The upgrades reflect the Sanlam group's continued strong business position, capitalisation and operating performance relative to its peers, which it has maintained despite a worsening operating environment. Fitch also views favourably the earnings diversification provided by Sanlam Emerging Markets (SEM), which contributed 20% to Sanlam's group operating profit in 1H16.

A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Sanlam's well-established and diversified business position in South Africa is a key rating strength. Sanlam sells a wide range of investment, insurance and other personal finance products to individuals and institutional clients. Investment-type business is the main component (2015: 64%, 2014: 60%) of total funds received, and is mainly derived from South Africa.

Santam, the group's majority owned non-life subsidiary, is the largest general insurer in South Africa, with a strong domestic franchise and a market share of around 21%. It writes all classes of business and has a well-known brand in both commercial and personal lines.

Capital is conservatively managed, with Sanlam Life's statutory capital adequacy requirement (CAR) cover ratio remaining strong at 5.3x at end-1H16 (end-2015: 5.8x), the highest level in its peer group. The group's capital position is supportive of its ratings with a Prism factor-based capital model score of "extremely strong" at end-2015.

Sanlam reported ZAR3.1bn of discretionary capital, i. e. capital regarded by the group as being in excess of economic capital requirements, at 30 June 2016 (end-2015: ZAR2.3bn, end-2014: ZAR3.3bn). The group's largest investment over the past year is the ZAR4.2bn acquisition of a 30% interest in Morocco-based Saham Finances S. A., which was completed in 1H16. We believe that Sanlam will continue using excess capital to invest in high-growth business opportunities outside South Africa.

The net operating profit improved 11% yoy supported by a 40% rise for SEM. Despite this, the group's normalised headline earnings to 30 June 2016 decreased by 7% as net investment returns declined 67%. Sanlam's earnings generation is strong and compares favourably with that of its leading peers. Santam has a long history of underwriting profitability, and in 1H16 reported a strong combined ratio of 94%, albeit weaker than 1H15 (91%). Fitch views favourably Santam's consistently strong operating performance and profitability track record.

Most South African-based life insurers have reported weakening net customer cash flows, reflecting the difficult local economic environment. In addition, the sector remains exposed to domestic credit and other investment risks through exposure to local financial markets. However, these risk factors do not adversely affect the life insurance sector's creditworthiness relative to that of the South African sovereign.

Sanlam Life, SDM and Santam are assessed as "core" to the Sanlam group under Fitch's 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

A substantial and sustained deterioration in capitalisation (in terms of Fitch's Prism score or Sanlam Life's CAR cover ratio), a weak operating performance or a severe weakening of market share could lead to a downgrade.

A downgrade of Santam's ratings could be triggered by a 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 and/or severe weakening in Santam's market share.

FULL LIST OF RATING ACTIONS

Sanlam Life Insurance Limited

National IFS rating: upgraded to 'AAA(zaf)' from 'AA+(zaf)'; Outlook Stable

National Long-Term rating: upgraded to 'AAA(zaf)' from 'AA(zaf)'; Outlook Stable

National Short-Term rating: affirmed at 'F1+(zaf)'

Subordinated debt: upgraded to 'AA(zaf)' from 'A+(zaf)'

Sanlam Developing Markets Limited

National IFS rating: upgraded to 'AAA(zaf)' from 'AA+(zaf)'; Outlook Stable

National Long-Term rating: upgraded to 'AAA(zaf)' from 'AA(zaf)'; Outlook Stable

Santam Limited

National IFS rating: upgraded to 'AAA(zaf)' from 'AA+(zaf)'; Outlook Stable

National Long-Term rating: upgraded to 'AAA(zaf)' from 'AA(zaf)'; Outlook Stable

Subordinated debt: upgraded to 'AA(zaf)' from 'A+(zaf)'

Sanlam Limited

National Long-Term rating: upgraded to 'AA+(zaf)' from 'AA-(zaf)';