Johannesburg, 2 August 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Home Finance Guarantors Africa (Reinsurance) Limited of A+(MU), with the outlook accorded as Stable. The rating is valid until 31 July 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Home Finance Guarantors Africa (Reinsurance) Limited (“HFGA Re”) based on the following key criteria:
The reinsurer is a limited by guarantee company (“LBG”) established and domiciled in Mauritius since 2009. An LBG is similar to a non-profit organisation, with founding documents prohibiting distribution of surpluses or capital to directors and members. The LBG structure is favourably viewed from a credit perspective, given the absence of tax and dividend distributions.
HFGA Re’s sole member company is Home Finance Guarantors Africa (“HFGA”), which is also limited by guarantee. HFGA, which raises the capital required for HFGA Re, was created by Housing 4 HIV NPC (“H4H”) in South Africa and has committed resources to HFGA Re.
HFGA Re has been established 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 these markets have demonstrated a lack of appetite to extend mortgage loans to mid and lower income borrowers, and if they do, mortgage extenders typically require a cash deposit from the borrower. This acts as a material hindrance to the potential borrowers accessing the loan. To address this, HFGA Re has entered into reinsurance or retrocession arrangements with counterparties in select African countries, through the introduction and implementation of Collateral Replacement Indemnity (“CRI”), which replaces the need for a cash deposit from the borrower. CRI indemnifies the lender against the specified portion of the loss suffered as a result of a default on the part of the borrower. This portion varies between lenders and countries, and is expected to average between 20% and 30% of the loan value, being the equivalent of the deposit requirements.
Lenders buy CRI cover from local insurance companies, which are supported by HFGA Re through reinsurance or retrocession arrangements. 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 proceeds of the sale of the property relative to the amount outstanding, up to the extent of the loss or its reinsured portion, whichever is the lesser.
HFGA Re’s modus operandi is based on that of South African company, Home Loan Guarantee Company NPC (“HLGC”), which has been operational in South Africa for 26 years. Accordingly, the reinsurer benefits from an established product design, coupled with a comprehensive process framework to manage and monitor product distribution and performance. Management is considered to possess a high level of technical expertise, contributing positively to GCR’s view of the company’s capacity to attain key targets over the medium term.
GCR views CRI to be very relevant to the underlying markets, translating into a high likelihood of demand and acceptance over the medium to longer term. Furthermore, the niche nature of the product and risk rating approach is viewed as a competitive strength, while the framework for containing underwriting risk is viewed to be strong. Statistically-based premium rates are expected to provide adequate coverage for the projected loss experience, and the reinsurer participates throughout via the web based Guarantee Management System (“GMS”), which all parties are required to use for CRI.
Capital adequacy is assessed to be very strong, with the reinsurer reflecting 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. In this regard, nominal and risk adjusted solvency measures are projected to remain strong, while the ratio of capital to on risk cover is expected to exceed 50% over the next four years, indicating a high level of excess. Capital accumulation is reliant on additional cash transfers over the medium term (in the form of loans and investment income allocations). Accordingly, GCR’s assessment of earnings tolerance assumes the continuation of these inflows to support a high level of earnings tolerance with respect to scale efficiency risk and potential investment market volatility.
The reinsurer reflects very strong liquidity levels, which represent a rating strength. Liquidity risk is further mitigated by the scale of the overall investment portfolio relative to projected insurance liabilities and claims. Balance sheet risk is reasonably contained, with the investment composition projected to remain moderately conservative over the rating horizon.
While GCR assesses HFGA Re’s risk management to be sound, the non-traditional nature of the product and infancy of the low- and middle-income mortgage markets in the intended countries increases forecasting uncertainty. Further, in the event of borrower default, the insurer is exposed to housing market corrections, although this is limited given that the lenders carry the majority of the loan exposure.
Upward rating movement may be achieved over the medium term should CRI gain the expected level of uptake, while evidencing a strengthening in geographic, policyholder and lender/exposure diversification. This is premised on sustained strong key credit protection metrics. In contrast, downward rating action may follow a severe weakening in capital adequacy or liquidity to levels that are below expectations. A reduction in capital support from the member company would weaken the reinsurer’s credit profile over the longer term.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2014)|
|Claims paying ability: A+(MU)|
|Last rating (July 2016)|
|Claims paying ability: A+(MU)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Marc Chadwick|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|+27 11 784-1771||+27 11 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Criteria for Rating Newly Established and Start-Up Insurance Companies, updated July 2016
HFGA Re rating reports, 2014 – 2016
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.
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 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 included:
- The latest audited annual financial statements to 31 December 2016
- Three years of comparative audited financial statements to 31 December
- Full year financial projections to 31 December 2022
- Actuarial report at December 2016.
- Other documentation related to the rating exercise
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Balance Sheet||A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|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.|
|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.|
|Forecast||A calculation or estimate of future financial events.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Risk Rating||The statistical process by which insurers determine risks and pricing for the basic classes of insurance.|
|Rating Horizon||The rating outlook period|
|Reinsurance||The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued.|
|Retrocession||The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|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.|
For a detailed glossary of terms, please click here
GCR affirms Home Finance Guarantors Africa (Reinsurance) Limited’s rating of A+(MU); Outlook Stable