Announcements

GCR accords an initial rating of AA+(ZA) to Home Loan Guarantee Company NPC; Outlook Stable.

Johannesburg, 24 November 2015 — Global Credit Ratings has today assigned an initial national scale claims paying ability rating to Home Loan Guarantee Company NPC of AA+(ZA), with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to Home Loan Guarantee Company NPC (“HLGC”) based on the following key criteria:

HLGC was established in 1989 as a South African non-profit insurance company, and has no shareholders or owners. The insurer has a specialist licence, and was established with the sole purpose of providing guarantees to lending institutions against home loan defaults by low income borrowers, facilitating access to housing in an underserviced market at a time of political and social turmoil in South Africa. This is currently achieved through HLGC’s collateral replacement indemnity (“CRI”). The CRI indemnifies lenders against loss as a result of borrower default on home loan payments, for any reason except death of the borrower. HLGC actively manages its default risk, including potential HIV and AIDS related risks.

HLGC reflects a degree of capital redundancy relative to business volumes, translating into very strong capital adequacy on a nominal and risk adjusted basis. Capital strength is expected to be sustained over the rating horizon against a reducing risk base. Furthermore, key liquidity measures have been sustained at very strong levels, and are expected to remain within a sound range under the prevailing investment mandate.

HLGC is a specialised niche insurer, and its position is uncontested by the commercial insurance market. Furthermore, GCR views strategic management to represent a key strength. The executive team has an established track record of success in managing the risks associated with the CRI under extremely challenging economic and political conditions in the past. HLGC’s non-profit status is favourably viewed, given the absence of tax and dividend distributions. However, this structure limits financial flexibility, as the insurer does not have owners and is unable to access formal capital markets.

Given the insurer’s social objectives and status as a non-profit organisation, emphasis is placed on capital preservation rather than profitability. As such, the recent ability to generate net surpluses in support of capital growth is positively viewed by GCR. As HLGC is a specialist monoline insurer, diversification is achieved through geographic spread, while the borrower profile is distributed across all economic sectors. The expiry of the Absa Bank Limited contract is expected to reduce the granularity of the borrower base and could give rise to greater concentration risk, although this has been effectively managed in the past.

The large listed equity portfolio increases exposure to investment risk. Note is, however, taken of the low historical claims experience and strong risk adjusted capitalisation, which in GCR’s view positions the insurer to absorb a degree of potential market volatility.

GCR does not envisage a material change in key credit fundamentals to the extent that these would result in a change in the rating over the short to medium term.

NATIONAL SCALE RATINGS HISTORY

Initial / last rating (November 2015)

Claims paying ability: AA+(ZA)

Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Susan Hawthorne
Senior Credit Analyst
(011) 784-1771
susanh@globalratings.net

Committee Chairperson
Marc Chadwick
Sector Head: Insurance Ratings
(011) 784-1771
chadwick@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2015

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Capital The sum of money that is invested to generate proceeds.
Capitalisation The provision of capital for a company, or the conversion of income or assets into capital.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its risks.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Credit Rating Agency An entity that provides credit rating services.
Creditworthiness An assessment of a debtor’s ability to meet debt obligations.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
Experience A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.
Financial Flexibility The company’s ability to access additional sources of capital funding.
Investment Risk The risk of a decline in the net realisable value of investment assets arising from adverse movements in market prices or factors specific to the investment itself (e.g. reputation and the quality of management).
Liquidity The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
Loss The happening of the event for which insurance pays.
National Scale Rating The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
Policyholder The person in actual possession of an insurance policy.
Portfolio All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.
Rating Horizon The rating outlook period
Rating Outlook A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securities Various instruments used in the capital market to raise funds.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Short Term Current; ordinarily less than one year.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Home Loan Guarantee Company NPC participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating has been disclosed to Home Loan Guarantee Company NPC with no contestation of the rating.

The information received from Home Loan Guarantee Company NPC and other reliable third parties to accord the credit rating(s) included:

  • Audited financial statements to 30 June 2015
  • Four years of audited comparative numbers to 30 June
  • Budgeted financial statements to 30 June 2016
  • Qualitative and quantitative statutory returns to 30 June 2015
  • Quarterly statutory return to 30 June 2015
  • Other relevant documents

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

GCR accords an initial rating of AA+(ZA) to Home Loan Guarantee Company NPC; Outlook Stable.

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