Rating Action
Johannesburg, 17 March 2020 – GCR Ratings (“GCR”) has revised Home Finance Guarantors Africa (Reinsurance) Limited’s (“HFGA Re”) Mauritius national scale financial strength (formerly claims paying ability) rating to A-(MU) from A+(MU), with the Outlook accorded as Stable. The lowering of the rating does not reflect a change in credit fundamentals but is a result of implementation of the new methodology.
| Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook/Watch |
| Home Finance Guarantors Africa (Reinsurance) Limited | Financial strength | National | A-(MU) | Stable Outlook |
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for HFGA Re was placed ‘Under Criteria Observation’. GCR has finalised the review of HFGA Re under the Criteria for Rating Insurance Companies, May 2019. As a result, the rating has been revised in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
Rating Rationale
HFGA Re’s rating reflects its very strong financial profile, with capital and liquidity levels viewed to be well in excess of requirements over the outlook horizon, while assets are diversified across a range of international domiciles. This is partly offset by the reinsurer’s operational exposure to certain higher risk countries and limited business profile, given its specific developmental mandate.
HFGA Re’s risk adjusted capitalisation is very strong, with GCR CAR cover registering at around 4x and coverage of gross on risk cover equating to more than 7x. Similarly, liquidity has been maintained at very high levels, with stressed financial assets being significantly above net technical reserves and operational liquidity requirements. Going forward, continued funding injections are expected to maintain capitalisation and liquidity at very strong levels against anticipated stability in business volumes.
Earnings are viewed to be slightly negative to the rating. The funding arrangements that are in place ensure sufficient inflows to offset underwriting losses, although the reinsurer is viewed to have a high exposure to market risk, which has resulted in volatility in net earnings over the review period.
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 needing to pay a deposit. The assessment of competitive position balances the reinsurer’s very small scale and comparatively limited franchise strength with the strategic execution in terms of delivery on its social development mandate. The CRI has been successfully introduced into more than eight countries (after legislation was changed to make this possible) and there is an increased understanding and awareness of the product, and recognition of its alignment with governments’ affordable housing initiatives.
Given the niche business model, premiums are solely derived from the CRI product, although the premium diversification assessment considers a level of diversification across geographies and financial institutions, as well as management of product risk through embedded processes and systems.
Rating stability is expected to be underpinned by the very large capital and investment base, which is viewed to be sufficient to absorb the impact of potential investment market volatility. The business profile is not expected to change materially over the outlook horizon, as cedants become increasingly comfortable to retain more risk, although further geographic diversification could be achieved as market dynamics improve in some of the key countries of operation.
Rating triggers
Positive rating action could follow a strengthening in the business profile through enhanced geographic diversification. The rating may be downgraded if there is a change in the funding structure that adversely impacts on the financial profile.
Analytical Contacts
| Primary analyst | Susan Hawthorne | Senior Analyst |
| Johannesburg, ZA | SusanH@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, January 2020 |
| GCR Insurance Sector Risk Scores, January 2020 |
Ratings History
Risk Score Summary
| Risk scores | |
| Operating environment | 12.50 |
| Country risk score | 8.50 |
| Sector risk score | 4.00 |
| Business profile | (2.00) |
| Competitive position | (1.00) |
| Premium diversification | (1.00) |
| Management and governance | 0.00 |
| Financial profile | 5.75 |
| Earnings | (0.25) |
| Capitalisation | 4.00 |
| Liquidity | 2.00 |
| Comparative profile | 0.00 |
| Group support | 0.00 |
| Peer analysis | 0.00 |
| Total Score | 16.25 |
Glossary
| Asset | A resource with economic value that a company owns or controls with the expectation that it will provide future benefit. |
| 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. |
| Coverage | The scope of the protection provided under a contract of insurance. |
| 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. |
| Downgrade | The rating has been lowered on its specific scale. |
| Financial Institution | An entity that focuses on dealing with financial transactions, such as investments, loans and deposits. |
| Guarantor | A party that gives the guarantee. |
| Income | Money received, especially on a regular basis, for work or through investments. |
| Indemnity | A security or protection against a loss or other financial burden. |
| Insurance | Provides protection against a possible eventuality. |
| 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. |
| Market Risk | Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors. |
| 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. |
| 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 Rating
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 the 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 Home Finance Guarantors Africa (Reinsurance) Limited. 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.
Home Finance Guarantors Africa (Reinsurance) Limited participated in the rating process via face-to-face 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 Home Finance Guarantors Africa (Reinsurance) Limited and other reliable third parties to accord the credit rating included:
- The audited financial statements to 31 December 2018;
- Four years of comparative audited financial statements to 31 December;
- Unaudited year to date management accounts to 31 December 2019;
- The budget summary to December 2024
- Other relevant documents.
