Today's rating actions reflect the weakening credit profile of the South African government, as indicated by the downgrade of the Government of South Africa's issuer rating to Ba2 from Ba1, and the gradual weakening of the South African banking system, resulting in lower credit profiles of these insurers given their sizeable balance sheet exposure to government debt securities and cash and short-term instruments issued by local banks. In addition, Moody's expects the increasingly challenging operating environment to place pressure on insurers' profitability, asset quality and capitalisation.
Moody's considers these insurance groups' key credit fundamentals (asset quality, capitalisation, profitability and financial flexibility) to be partly correlated to - and thus linked to - the economic and market conditions in South Africa, where they are domiciled and have significant operations. The significant majority of these insurers' invested assets are held in local assets, including South African government debt, local corporate debt and equity securities and real estate, while the insurers' cash and short-term investments are held with the large South African banks. Despite the effort of some of these insurers to diversify their operations outside of South Africa, the vast majority of their profits are still generated locally.
Moody's expects the operating environment for insurers to come under increasing pressure as declining consumer discretionary income and volatile financial markets supress demand for insurance and savings products and reduce insurers' own investment income. Moody's expects for South Africa a GDP contraction of 6.5% in 2020 and growth of 4.5% in 2021, significantly below the level required to reduce both high poverty and unemployment levels (29.1%, 2019) materially.
Additionally, the unprecedented deterioration in the global economic outlook caused by the coronavirus outbreak has exacerbated South Africa's economic and fiscal challenges and negatively impacted insurers' credit profiles through asset quality, profitability and liquidity pressures. For life insurers, the coronavirus has led to higher mortality and morbidity losses, placing additional pressure on profitability. However, because the increased mortality has impacted disproportionally the older age population, the overall impact on the protection business has been moderated so far by the relatively low level of life insurance uptake in this part of the population. In addition the weakening economy, along with the economic ramifications of coronavirus, could lead to rising policy lapse rates which would negatively impact insurers' profitability and capitalisation.
IFS RATINGS ON MML AND DISCOVERY REMAIN ABOVE SOVEREIGN RATING
Moody's also notes that, despite the linkage to the sovereign credit profile, the IFS rating of MML remains above the sovereign rating, reflecting its solid capitalisation and the flexible liability profile of some of its products. In particular, the products' features offer a relatively high ability to share asset losses with policyholders by permitting MML the right to retract non-vested policyholder bonuses, or to utilize funds in the bonus stabilisation accounts and/or make lower future bonus declarations to policyholders. Similarly, for Discovery, Moody's considers the notional IFS assessment for the group to be one-notch above the sovereign rating of the Government of South Africa, reflecting the agency's view that Discovery's diverse business mix, significant fee income and moderate asset leverage reduces the exposure to South African sovereign risk.
NEGATIVE OUTLOOK REFLECTS SOVEREIGN OUTLOOK
The negative outlook on the insurers is aligned with the outlook on the sovereign rating, which reflects the risks that the debt burden and debt affordability could deteriorate significantly more than Moody's currently projects. This partly reflects downside risks to both growth and the fiscal consolidation assumed in the baseline. It also reflects the potential for further financial demands from state-owned enterprises (SOEs) or for higher interest rates given possible shocks to confidence.
NATIONAL SCALE RATINGS (NSR)
The National Scale Credit Ratings (NSRs) for the insurers were affirmed as a result of a recalibration of South Africa's NSR mappings, triggered by the downgrade of South Africa's government bond rating. Moody's NSRs are opinions of the relative creditworthiness of issuers and financial obligations within a particular country. NSRs are not designed to be compared among countries. Rather, they address relative credit risks within a given country. Moody's assigns NSRs in certain local capital markets in which investors have found that the global rating scale provides inadequate differentiation among credits or is inconsistent with a rating scale already in common use in the country. The last two characters of the national scale rating indicate the country in which the issuer is located or the market of issuance.
While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309 .
RATINGS RATIONALE – INDIVIDUAL INSURERS
--- Discovery Limited: Long-term issuer rating downgraded to Ba3 from Ba2, with negative outlook. National scale long-term issuer rating affirmed at A1.za
Moody's downgraded Discovery's long-term issuer rating to Ba3 from Ba2 following the downgrade of the South African sovereign rating, and to reflect the group's exposure to the South African operating environment and local sovereign and bank credit risk. While Discovery's international businesses continue to grow, its South African operations remain the dominant part of its business, accounting for around 78% of its 2020 pre-covid operating profits. The group's national scale long-term issuer rating was affirmed at A1.za.
Discovery's Ba3 long-term issuer rating reflects the group's very strong franchise in South Africa and its growing global footprint through its Vitality brand and platform, its strong profitability and significant non-insurance fee income from Discovery Health, moderate exposure to local investments because of the capital-light nature of its business, and good capitalization on both a regulatory and economic basis. These strengths are partially offset by the group's substantial business exposure to South Africa and the challenging operating environment, pressure on the profitability of its Vitality Life business in the UK due to very low interest rates and the complexity inherent in its shared value insurance model. While Discovery Bank is still small relative to the overall group, its lending book exposes the group to rising consumer credit risk in the weakening economic environment, albeit that Discovery's clients tend to be more insulated from this than the general population.
Discovery's profitability has been meaningfully impacted by financial markets volatility and expected elevated mortality experience as a result of coronavirus, with the group recording a reserve of approximately R3.4 billion as of 30 June 2020, which it expects will be sufficient to cover the full current and future impact of coronavirus with respect to mortality and lapses. In addition, rising interest rates in South Africa and the decline in UK interest rates have had significant negative impacts on reported profitability, to the extent of R3.6 billion and R1.2 billion for the South African and UK operations, respectively, although the economic and capital impact on the group are limited. Despite the above mentioned effects of coronavirus, the group's operating performance has remained good, with persistency remaining ahead of expectations, and its emerging businesses, most materially Discovery Bank, continuing to perform in line with expectations. As such Moody's expects Discovery's profitability to return to more normalised levels over the next year, albeit that the weakening operating environment and ongoing pandemic present downside risks to the group's forward-looking operating performance.
--- Momentum Metropolitan Life Limited: IFS rating downgraded to Ba1 from Baa3, with negative outlook. National scale IFS rating affirmed at Aaa.za.
Moody's downgraded MML's global scale IFS rating to reflect lower asset quality following the downgrade of South Africa and the weakening of the South African banking system, and MML's exposure to the South African operating environment.
MML's IFS ratings reflect the insurer's top tier market position in South Africa, its solid capital position and its flexible product characteristics which serve to reduce the impact on the group from stress related to credit pressures at the sovereign level. Despite MML's solvency cover ratio reducing to 1.85x at FY20 from 2.08x at FY19 as a result of the negative impact of the coronavirus, including falls in investment markets, the group remains well-capitalised and within its stated solvency target ranges. These strengths are partially offset by the group's exposure to South Africa, both in the form of its invested assets and revenues. These are susceptible to the pressure on the domestic economy and the effects of coronavirus which significantly impacted FY20 earnings via additional life insurance provisions and market losses. As a result the group has said that it will most likely not achieve its "Reset and Grow" profitability target in FY21.
Moody's expects the weakening economy and pressure on consumer income to present significant headwinds to MML's savings and investment businesses, which had recently started gaining improved traction under its new strategy. In addition, the group's corporate and employee benefits division, which has been a key source of profitability, is likely to experience higher disability claims in the event of rising unemployment and lower new business volumes as a result of the significant GDP contraction during 2020.
MML is the primary life insurance subsidiary of Momentum Metropolitan Holdings Limited, a leading insurance group in South Africa, that was formed in 2010 following the merger of two long established life insurance and investment groups, Momentum and Metropolitan.
--- Guardrisk Group: IFS rating of rated subsidiaries downgraded to Ba2 from Ba1, with negative outlook. National scale IFS ratings affirmed at Aaa.za.
Moody's downgraded the global scale IFS ratings of entities in the Guardrisk group to reflect lower asset quality following the downgrade of South Africa and the weakening of the South African banking system, and the group's exposure to the South African operating environment.
The Ba2 global scale IFS ratings of entities in the Guardrisk group - as well as the Aaa.za national scale IFS ratings of the South African entities - reflect its good market position as the largest cell captive insurer in the South African market, low underwriting risk due to its predominately fee based model, diverse product mix across life insurance and short-tailed non-life insurance lines, and strong profitability. These strengths are partially offset by its investment portfolio's concentrated exposure to the South African economy and banking system with a significant majority of Guardrisks group's invested assets comprising South African bank deposits, government debt and investments in money market funds. Also, Guardrisk group has a lower regulatory capital buffer above the new South African Solvency Assessment and Management framework (SAM) capital requirements due to non-recognition of surplus capital in cells for regulatory capital purposes, and is exposed to corporate credit risk through its reliance on cell-owners to recapitalise cells in the event needed. Deterioration in the local economy, exacerbated by the economic effects of coronavirus, will lead to rising corporate credit risk.
The rated entities included in the Guardrisk group, collectively referred to as Guardrisk, include Guardrisk Insurance Company Limited, Guardrisk Life Limited (Guardrisk Life) and Guardrisk International Limited PCC (Guardrisk International), incorporated in Mauritius (Government of Mauritius, Baa1 negative). Guardrisk Insurance and Guardrisk Life are rated both Ba2 on the global scale, and Aaa.za on the national scale, while Guardrisk International is rated Ba2 on the global scale only. Additionally, while Guardrisk is comprised of various regulated entities, we consider Guardrisk's various entities to be a single analytic unit, and, as such rate them at the same level, including Guardrisk International, which although it is regulated, capitalised and increasingly managed separately from the broader Guardrisk group, remains an integral part of the group and therefore the analytic unit.
--- Standard Insurance Limited: IFS rating downgraded to Ba2 from Ba1, with negative outlook. National scale IFS rating affirmed at Aa1.za.
Moody's downgraded SIL's global scale IFS rating to reflect lower asset quality following the downgrade of South Africa and the weakening of the South African banking system, and SIL's exposure to the South African operating environment.
SIL's Ba2 global scale, and Aa1.za national scale, IFS ratings reflect the insurer's established market position as a mid-tier short-term insurer in the South African market, good brand recognition and credibility afforded by its affiliation with Standard Bank, strong and consistent profitability, partly due to lower acquisition costs resulting from the sales and distribution arrangement with its parent, and strong capitalization relative to regulatory capital requirements. These strengths are partially offset by its investment portfolio's concentrated exposure to the South African economy and banking system, very high gross modelled natural catastrophe exposure relative to capital, and limited product and geographic diversification, with high concentration in residential property exposure.
SIL is a wholly-owned subsidiary of the Standard Bank Group Limited (SBG, long-term Issuer rating Ba3, negative) and an affiliate of South Africa's largest bank, by assets, The Standard Bank of South Africa Limited (SBSA, long-term Deposits Ba2, negative, BCA ba2). While SIL benefits from the Standard name, and to a large extent services a subset of SBSA's customers, the rating does not incorporate any support from SBG.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
--- Discovery Limited
Given the negative outlook for Discovery and the Government of South Africa, there is limited upward pressure on the rating over the next 12 to 18 months.
Conversely, the following factors could lead to downward pressure on the ratings: (i) negative rating action on the South African sovereign or banking sector, (ii) failure to maintain regulatory capital levels comfortably above management's minimum target level, (iii) material uncertainty about the sustainability of the fee income generated by Discovery Health, including loss of the management contract with Discovery Health Medical Scheme (DHMS), or material deterioration in expected earnings sourced from DHMS, (iv) sustained increase in the group's financial leverage, meaningfully beyond its 28% Financial Leverage Metric, (v) rapid growth in banking assets that decreases the group's resilience to sovereign-related stress scenarios, (vi) material weakening in the group's franchise, including evidence that casts doubt on the viability of the "Shared Value Insurance Model".
--- Momentum Metropolitan Life Limited
Given the negative outlook for MML and the Government of South Africa, there is limited upward pressure on the rating over the next 12 to 18 months.
Conversely, the following factors could lead to downward pressure on the ratings: (i) negative rating action on the South African sovereign or banking sector, (ii) failure to maintain regulatory capital, comfortably above management's minimum target level, (iii) meaningful reduction in the proportion of its flexible liability products relative to its overall non-unit linked liabilities.
--- Guardrisk Group
Given the negative outlook for Guardrisk and the Government of South Africa, there is limited upward pressure on the rating over the next 12 to 18 months.
Conversely, the following factors could lead to downward pressure on the ratings: (i) negative rating action on the South African sovereign or banking sector, (ii) failure to maintain regulatory capital levels comfortably above management's minimum target, and (iii) material weakening in the Guardrisk's franchise, including regulatory or market changes that limit the appeal of the cell captive insurance model in South Africa.
--- Standard Insurance Limited
Given the negative outlook for SIL and the Government of South Africa, there is limited upward pressure on the rating over the next 12 to 18 months.
Conversely, Moody's noted that the following factors could lead to a downgrade of the group's ratings: (i) negative rating action on the South African sovereign or banking sector, (ii) failure to maintain regulatory capital levels comfortably above management's minimum target level , (iii) meaningful reduction in reinsurance limits and capacity, including reinstatements, relative to modeled natural catastrophe exposures, and (iv) termination of the bancassurance agreement with SBSA.
LIST OF AFFECTED RATINGS
Issuer: Discovery Limited
Downgrade:
…Long-term Issuer Rating downgraded to Ba3 from Ba2
Affirmation:
…National scale Long-term Issuer rating affirmed A1.za
Outlook action:
..Outlook remains Negative
Issuer: Standard Insurance Limited
Downgrade:
...Insurance Financial Strength Rating downgraded to Ba2 from Ba1
Affirmation:
...National scale Insurance Financial Strength Rating affirmed Aa1.za
Outlook action:
..Outlook remains Negative
Issuer: Guardrisk Insurance Company Limited
Downgrade:
...Insurance Financial Strength Rating downgraded to Ba2 from Ba1
Affirmation:
...National scale Insurance financial strength rating affirmed Aaa.za
Outlook action:
..Outlook remains Negative
Issuer: Guardrisk International Limited PCC
Downgrade:
...Insurance Financial Strength Rating downgraded to Ba2 from Ba1
Outlook action:
..Outlook remains Negative
Issuer: Guardrisk Life Limited
Downgrade:
...Insurance Financial Strength Rating downgraded to Ba2 from Ba1
Affirmation:
...National scale Insurance financial strength rating affirmed Aaa.za
Outlook action:
..Outlook remains Negative
Issuer: Momentum Metropolitan Life Limited
Downgrades:
...Long-term Issuer rating downgraded to Ba2 from Ba1
...Insurance Financial Strength Rating downgraded to Ba1 from Baa3
...Subordinated debt downgraded to Ba3(hyb) from Ba2(hyb)
...Backed Subordinated debt downgraded to Ba3(hyb) from Ba2(hyb)
...Subordinated MTN program downgraded to (P)Ba3 from (P)Ba2
...Backed Subordinated MTN programme downgraded to (P)Ba3 from (P)Ba2
Affirmations:
...National scale Long-term Issuer rating affirmed Aa1.za
...National scale Insurance financial strength rating affirmed Aaa.za
...National scale subordinated debt affirmed Aa3.za(hyb)
...National scale backed subordinated debt affirmed Aa3.za(hyb)
...National scale subordinated MTN program affirmed Aa3.za
...National scale backed subordinated MTN program affirmed Aa3.za
Outlook action:
..Outlook remains Negative
PRINCIPAL METHODOLOGIES
The principal methodology used in rating Discovery Limited, Guardrisk Life Limited and Momentum Metropolitan Life Limited was Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 . The principal methodology used in rating Guardrisk Insurance Company Limited, Guardrisk International Limited PCC and Standard Insurance Limited was Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309 .
