|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Home Finance Guarantors Africa (Reinsurance) Limited||Financial strength||National||A-(MU)||Negative Outlook|
Home Finance Guarantors Africa (Reinsurance) Limited’s (“HFGA Re”) rating balances very strong capitalisation and liquidity with limited premium scale and diversification, alongside a shrinking mandate further affecting its competitive position.
Capital contribution from their sole member, Home Finance Guarantors Africa Ltd, has come to an end in 2021 due to the completion of the Credit Facility Agreement between the Agence Francaise de Développement and Home Finance Guarantors Africa Ltd. However, HFGA Re’s risk-adjusted capitalisation is very strong, with the GCR capital adequacy ratio (“CAR”) registering at a high 3.8x at HY21. Similarly, liquidity has been maintained at very high levels, with stressed financial assets being significantly above net technical reserves and operational liquidity requirements at FY20 and 7M F21.
HFGA Re’s business profile is a function of its specific developmental role in promoting access to affordable housing in Africa. This has been achieved by introducing and promoting acceptance and use of the Collateral Replacement Indemnity (“CRI”) in a number of markets, which makes it possible for lower income and first-time buyers to obtain mortgage loans without paying a deposit. Despite the reinsurer’s very small scale, an ESG uplift is given in the Competitive Position score to reflect the social mandate of HFGA Re. Going forward, however, we believe that the successful completion of its mandate through established reinsurance agreements is reducing HFGA Re’s involvement in the target markets.
Earnings are viewed to be negative to the rating since HFGA Re has been operating at a loss for FY20 and 7M F21. The loss is due to volatility in investment income and a 4x increase in operational expenses, which are expected to be maintained to the current level. GCR expects the investment income to offset operational expense requirements partly, but remain subject to market volatility. As a result, the surplus in capital and investments could reduce over the longer term.
Given the niche business model, premiums are solely derived from the CRI product, which may be susceptible to higher levels of cyclicality.
The Outlook is Negative as GCR expects through-the-cycle earnings to remain exposed to a level of volatility and we believe that HFGA Re’s successful reinsurance partnerships will reduce its direct involvement in the target markets. However, we expect risk-adjusted capitalisation and liquidity to remain very strong over the outlook horizon, supported by limited investment market and underwriting risk.
The business profile is expected to continue to be restrained over the outlook horizon, given the low premium scale and specialist strategy.
The ratings pressure emanate from the entity’s reducing direct involvement in the markets, and the weakening of profitability.
The rating could improve, albeit unlikely over the short-term period, if HFGA Re clearly articulates a long-term growth strategy while earnings improve significantly and sustainably.
|Primary analyst||Vinal Ramdenee||Senior Analyst: Insurance Ratings|
|Ebene, MU||VinalR@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, November 2020|
|GCR Insurance Sector Risk Scores, July 2020|
Home Finance Guarantors Africa (Reinsurance) Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(MU)||Stable Outlook||July 2014|
|Financial strength||Last||National||A-(Mu)||Negative Outlook||October 2021|
Risk score summary
|Rating components and factors||Risk score|
|Country risk score||8.25|
|Sector risk score||4.50|
|Management and governance||0.00|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|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.|
|Collateral||Asset provided to a creditor as security for a loan or performance.|
|Country Risk||The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures 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.|
|Indemnity||A security or protection against a loss or other financial burden.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. 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.|
|Loan||A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.|
|Mandate||Authorisation or instruction to proceed with an undertaking or to take a course of action. A borrower, for example, might instruct the lead manager of a bond issue to proceed on the terms agreed.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Mortgage Loan||A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Underwriting||The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated entity. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from the rated entity and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2020;
- Four years of comparative audited financial statements to 31 December 2020;
- Unaudited management accounts to 31 July 2021;
- Other relevant documents.