Johannesburg, 31 July 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating accorded to Home Finance Guarantors Africa (Reinsurance) Limited of A+(MU) with the outlook accorded as Stable. The rating is valid until 31 July 2019.
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:
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 as a niche insurer in South Africa for 28 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 100% over the next three years, indicating a high level of excess. Capital accumulation has historically been underpinned by cash transfers in the form of loans and investment income allocations, and was complemented by the investment market driven net surplus reported in FY17. Going forward, continued cash transfers are expected to offset scale efficiency limitations and potential investment market volatility, supporting GCR’s view of a high level of earnings tolerance.
The reinsurer reflects very strong liquidity levels, which represent a rating strength. GCR’s assessment of HFGA Re’s overall liquidity profile further considers the large and diversified portfolio of tradable funds relative to projected insurance liabilities. 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 in certain markets, 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. Conversely, downward rating action may follow a severe weakening in capital adequacy or liquidity to levels that are below expectations.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2014)|
|Claims paying ability: A+(MU)|
|Last rating (July 2017)|
|Claims paying ability: A+(MU)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Yvonne Mujuru|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Criteria for Rating Newly Established and Start-Up Insurance Companies, updated May 2018
HFGA Re rating reports, 2014 – 2017
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 financial statements to 31 December 2017
- Four years of comparative audited financial statements to 31 December
- Full year financial projections to 31 December 2022
- Actuarial report at December 2017
- Other relevant documents
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Balance Sheet||Also known as a 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||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.|
|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.|
|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.|
|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.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|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