Johannesburg, 1 December 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned 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 given the budgeted premium levels and the asset allocation strategy. 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. Nevertheless, if required, the insurer is able to generate net surpluses via dividends from its subsidiary. 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 rating horizon. Over the medium term, the rating could be sensitive to a reduction in capitalisation or liquidity.
NATIONAL SCALE RATINGS HISTORY
Initial / last rating (November 2015)
Claims paying ability: AA+(ZA)
Senior Credit Analyst
Sector Head: Insurance Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
HLGC rating report 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.
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 included:
- Audited financial statements to 30 June 2016
- Four years of audited comparative numbers to 30 June
- Budgeted financial statements to 30 June 2017
- Statutory returns to 30 June 2016
- Other relevant documents
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
|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.|
|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.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|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 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.|
|Loss||The happening of the event for which insurance pays.|
|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|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
For a detailed glossary of terms please click here
GCR affirms Home Loan Guarantee Company NPC’s rating of AA+(ZA); Outlook Stable.