Johannesburg, 18 Jul 2014 — Global Credit Ratings has today assigned an initial national scale claims paying ability rating to Home Finance Guarantors Africa (Reinsurance) Limited of A+(MU); with the outlook accorded as Stable. The rating(s) are valid until July 2015.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Home Finance Guarantors Africa (Reinsurance) Limited (“HFGA Re”) based on the following key criteria:
HFGA Re is a limited by guarantee company established and domiciled in Mauritius since 2009. The company operates as a non-profit organisation, with founding documents prohibiting distribution of profits or capital to directors and members.
HFGA Re has been established in order to promote the advancement of mortgage lending and housing finance to lower and middle income individuals in a number of developing African countries. Lending institutions in the select markets have demonstrated a lack of appetite to extend 100% mortgage loans to mid- and lower-income borrowers. Accordingly, mortgage extensions within such countries are currently premised on the placement of a minimum deposit of 20% to 30% of the loan value by the borrower. The large value of the down-payment acts as a material hindrance to the potential borrowers accessing the loan.
In order to address this, HFGA Re has entered into reinsurance or retrocession arrangements with counterparties in select African countries, through the introduction and implementation of a Collateral Replacement Indemnity (“CRI”). The CRI indemnifies the insured lender against the pre-specified portion of the loss suffered as a result of a default on the part of the borrower. This portion corresponds to the 20% to 30% portion of the loan that would otherwise be required as a down-payment.
Lenders buy CRI from local insurance companies, which are supported by HFGA Re through reinsurance or retrocession arrangements. The purchase of CRI cover acts as a substitute for the 20% to 30% deposit otherwise required for the granting of the loan. The risk transfer of the deposit portion from the lender to the insurer (and ultimately to HFGA Re) enables the 100% mortgage to be extended to qualifying borrowers. Notably, should default occur, HFGA Re incurs a loss only if, after a sale in execution, there is a shortfall in the value of the property relative to the loan. The business flowing to HFGA Re is reinsurance inwards business (85% quota share in the first years, reducing on staggered basis to 60% by year 4 of operations).
HFGA Re reflects a well-defined strategy, which benefits from an established product design, coupled with a comprehensive process framework to manage and monitor product distribution and performance. This is supported by strategic management which, in our view, possesses technical strength. The executive team has an established track record in both product creation and management. This contributes positively to GCR’s view of capacity to attain key financial targets over the medium term, while managing product risk exposure.
The framework for containing underwriting risk is strong. Statistically-based premium rates are expected to provide adequate coverage for the projected loss experience, while the reinsurer participates throughout the production chain via the integration of Guarantee Management Systems (“GMS”) into all parties’ CRI based processes.
GCR views the CRI product to be relevant to the underlying markets in which it will be introduced. Consequently, we see a high likelihood of strong demand for, and acceptance of, CRI, supporting uptake expectations over the forecast horizon. HFGA Re’s role as the primary facilitator of the CRI product is viewed to be a further rating strength, given the niche nature of the product, supporting the reinsurer’s ability to influence pricing, terms and conditions.
Capital adequacy is viewed to be excellent, with the reinsurer reflecting very high levels of capital redundancy relative to projected risk-based underwriting requirements. Capital strength is expected to be maintained as a buffer against multiple sources of risk/volatility, at levels sufficient to absorb a combination of high underwriting and market losses. HFGA Re’s large funding base provides the reinsurer with a very high level of earnings tolerance. Simultaneously, risk to earnings capacity is viewed to be well managed. High levels of investment income derived from fixed income instruments (built into the existing funding structure) will be used to offset operating costs, negating scale efficiency risk. The funding structure within the Housing 4 HIV (“H4H”) group of companies provides for additional fund raising, should it be required to facilitate growth.
Liquidity is expected to be recorded at sound initial levels, balancing out at adequate levels relative to liability-based and operational/claims-based requirements. This is expected to be supported by strong claims controls (containing average monthly claims) and the relatively short-tail nature of the product (minimising reserving risk, while strengthening confidence levels of technical provision coverage).
Despite HFGA Re’s sound risk management, and South African-based Home Loan Guarantee Company Limited’s (“HLGC”) proven track-record, the non-traditional nature of the product, coupled with the infancy of the low- and middle-income mortgage markets in the intended countries, means that the risk of earnings volatility remains high. Further, in the event of borrower default, the insurer is exposed to housing market corrections.
Asset risk is viewed to be moderately high, with the vast majority of assets exposed to market risk. HFGA Re adopts a moderately aggressive investment policy, with a view to achieving high investment returns in order to fund operational overheads. Capital absorption of high market risk capital charges allows for sufficient coverage of underwriting risk.
Upward rating movement may be achieved over the medium term should the product gain the expected level of uptake, while evidencing a contained claims experience that limits material earnings volatility, and demonstrates longer term product viability at proposed premium rating structures. Increased distribution across ceding companies may enhance diversification, and offset existing low levels of diversification recognised.
Downward rating movement may follow a severe weakening in capital adequacy below internal measures, most significantly stemming from a claims experience substantially above expectations, coupled with limited ability to reprice appropriately. A sustained weakening in realised investment income generative capacity, limiting the entity’s ability to cover operational costs, as well as a prolonged reduction in liquidity metrics, may also result in negative rating pressure.
For a detailed glossary of terms utilised in this announcement please click here
NATIONAL SCALE RATINGS HISTORY
Initial/Last Rating (July 2014)
Claims paying ability: A+(MU)
Rating outlook: Stable
Sector Head: Insurance
Sector Head: Financial Institutions
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies (July 2013)
Criteria for Rating Newly Established and Start-Up Insurance Companies (July 2013)
RATING LIMITATIONS AND DISCLAIMERS
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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.
Home Finance Guarantors Africa (Reinsurance) Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Home Finance Guarantors Africa (Reinsurance) Limited with no contestation of the rating.
The information received from Home Finance Guarantors Africa (Reinsurance) Limited and other reliable third parties to accord the credit rating(s) included the audited annual financial statements to December 2013, latest internal and/or external report to management, financial forecasts for six years’ prospective operations, example reinsurance and retrocession agreements, example reinsurance CRI agreements, loan agreements and applicable addendums relating to the AFD and H4H loans, documentation relating to the GMS system, stop loss reinsurance cover notes, and other documentation related to the rating exercise.
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 A+(MU) to Home Finance Guarantors Africa (Reinsurance) Limited; Outlook Stable.