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TEXT-S&P rates South African insurer Santam 'A-'; outlook stable

(The following statement was released by the rating agency)

Oct 10 - Overview

-- We are assigning our 'A-' long-term counterparty credit and insurerfinancial strength ratings and 'zaAA' South Africa national-scale rating toSouth Africa-based non-life insurer Santam Ltd . The outlook is stable.

-- The ratings reflect Santam's strong competitive position, strong andstable operating performance, and strong financial flexibility.

-- Santam's capitalization partially offsets these strengths; it is only"good," owing to material intangibles and equity risk, and the economic andindustry risks inherent in operating in South Africa, including a concentratedexposure to the banking sector.

-- The stable outlook reflects our expectation that Santam will continueto develop its competitive position through diversification, produce acombined ratio of 92%-96% (in line with its long-term average of 94%) andmanage risk exposures in line with capital resources to support the current"good" assessment.

Rating Action

On Oct. 10, 2012, Standard & Poor's Ratings Services assigned its 'A-'long-term counterparty credit and insurer financial strength ratings and'zaAA' South Africa national-scale rating to South Africa-based non-lifeinsurer Santam Ltd. The outlook is stable.

Rationale

The ratings on Santam reflect its strong competitive position, strong andstable operating performance, and strong financial flexibility. Thesestrengths are somewhat offset by Santam's capitalization, which is only"good," under our criteria, owing to material intangibles and equity risk.There are also economic and industry risks inherent in operating in SouthAfrica that weigh on our assessment; these include a concentrated exposure tothe banking sector.

The strong competitive position is based on Santam's dominant position andscale in the local market where it has a 23% share of gross premium written(GPW) in 2011. The company also has a broad and diverse product range,well-established brand, and strong client-servicing abilities. These strengthsare somewhat offset by the company's concentrated broker distribution model,use of underwriting managing agents (UMAs), and exposure to the industry andeconomic risks inherent to the South African market. That said, Santam hasstrong and long-standing relationships with its key intermediaries and, inmany cases, controlling equity stakes in UMAs, which provides oversight. Inaddition, the company's strategy is to diversify its business through SantamRe and by earning fee income as the non-life technical partner for Sanlam's(unrated) foreign strategic investments. Our base-case scenario expects thecompany's competitive position to continue to develop as a result of thesediversification initiatives. However, because the initiatives are relativelymodest in size, their initial financial impact is expected to be limited. Weexpect premium growth to be broadly in line with GDP plus consumer priceindex, with market share rising to 25% by 2014.

Santam's strong operating performance is key to the current ratings. Itreflects strong and stable underwriting and investment income. In June 2012,the company reported a combined ratio of 93.9% and an average combined ratioof 93.6% between 2007 and 2011. (Lower combined ratios indicate betterprofitability. A combined ratio of greater than 100% signifies an underwritingloss.) Loss and expense ratios are tightly controlled and the company's netincome has benefited from a net investment yield between 4% and 7% over thesame period. Our base-case scenario assumes that in 2012 Santam will produce acombined ratio of 92%-96%, and loss and expense ratios in line with currenthistorical averages of 67% and 27%, respectively.

We view Santam's financial flexibility as strong. This reflects the company'sstrong ability to generate cash and its limited growth in prospective capitalrequirements. We expect any future capital requirement to be met from retainedearnings.

Capitalization is viewed as good, although a relative weakness to the overallratings. The company has good capital adequacy, strong reinsurance support,and adequate reserves. The material intangible assets, equity risk, andconcentrated exposure to the South African banking sector weigh on our capitalassessment. At June 2012, Santam's equity exposures were 24% of investedassets or 62% of shareholders' equity; its asset exposure to four SouthAfrican banks was around 40% of invested assets. In mitigation, our assessmenttakes into account certain features of Santam's personal business; it canadjust premium rates or cancel policies monthly in this segment. Our base-casescenario expects Santam to manage risk exposures in line with capitalresources to support the current good assessment.

The economic and industry risk inherent in operating in South Africa is aweakness. We note some negative pressures from current social and economicimbalances in the country. These imbalances may, if they persist, result inthe economy failing to generate jobs, cause lower levels of real GDP growth,and encourage investor risk aversion. Although we consider that Santam is wellplaced to benefit from the new regulatory framework, Solvency Assessment andManagement (SAM), we expect it to place a significant burden on companies andthis is therefore a concern.

Outlook

The outlook is stable, reflecting our expectation that Santam will continue todevelop its competitive position through diversification, produce a combinedratio between 92%-96% (in line with its long-term average of 94%) and managerisk exposures in line with capital resources to support the current "good"assessment. There is limited scope for positive ratings action. Negativeratings action could stem from:

-- Capital adequacy reducing to a marginal level, which could result froma more-aggressive dividend policy or capital structure, or growth in excess ofretained earning capacity.

-- A downward revision of the sovereign rating on South Africa, which islikely to increase risk in Santam's investment profile.

-- A sustained operating underperformance compared with our expectations.

-- Execution risk arising from the strategic objectives to diversify thecompany.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global CreditPortal.

-- South Africa's Competitive Non-Life Insurance Industry FacesConstrained But Profitable Growth, June 12, 2012

-- Principles Of Credit Ratings, Feb. 16, 2011 -- Group Methodology, April 22, 2009 -- Interactive Ratings Methodology, April 22, 2009 -- Counterparty Credit Ratings And The Credit Framework, April 14, 2004

-- Refined Methodology And Assumptions For Analyzing Insurer CapitalAdequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

-- Criteria Update: Factoring Country Risk Into Insurer FinancialStrength Ratings, Feb. 11, 2003

Ratings List New Rating Santam Ltd. Counterparty Credit Rating Local Currency A-/Stable/-- South Africa National Scale zaAA/--/-- Financial Strength Rating Local Currency A-/Stable/-- ((Bangalore Ratings Team, Hotline: +91 80 41355898, Bhanu.priya@thomsonreuters.com,Group id: BangaloreRatings@thomsonreuters.com,Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net))

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