RPT-Fitch Affirms Home Loan Guarantee Company's IFS at 'AA+(zaf)'; Outlook Stable

Mon Mar 3, 2014 6:34am EST

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March 3 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed South Africa-based Home Loan Guarantee Company's (HLGC) National Insurer Financial Strength (IFS) rating at 'AA+(zaf)' with a Stable Outlook.

KEY RATING DRIVERS

The rating reflects HLGC's unique position as an insurer being a public benefit organisation providing guarantees to lending institutions against home loan default by borrowers in the low-income segment in South Africa, its strong capital position, low loss ratio and its established track record of sound and active risk management. However, the rating is constrained by the company's small size and its niche position.

HLGC's gross written premiums (GWP) were stable at ZAR12.1m in the six month ended 31 December 2013 (1H14) after they had grown substantially to ZAR24.8m in the financial year ended 30 June 2013 (FYE13) from ZAR13.5m in FYE12 benefitting from increased business volumes taken on from First National Bank (BBB/Stable) and ABSA Bank (A-/Stable). Fitch views also positively that HLGC was able to report a strong and improved surplus of ZAR14.3m for 1H14 (1H13: ZAR5.6m, FYE13: ZAR8.1m) benefiting from stronger investment income and an improved underwriting result. HLGC's expense base continues to be relatively high although expenses continued to decrease in 2013 in absolute terms as well as in relation to premium levels.

Fitch continues to view HLGC's capitalisation as strong based on its own risk-based capital assessment and expects capitalisation to remain commensurate with the rating level. However, net assets to net premiums continued to decline to 3x (FYE12: 5x, FYE11: 9x, FYE10: 43x) driven by the substantial growth in GWP in recent years.

HLGC increased its equity exposure to around 56% of invested assets at FYE13 (FYE12: 48%). Fitch views HLGC's equity exposure as high but commensurate with the rating given the company's strong capitalisation.

RATING SENSITIVITIES

Fitch views an upgrade of HLGC's rating as unlikely in the short to mid-term given HLGC's small size, its relatively high investment risk.

A downgrade could be triggered by a significant further weakening of HLGC's capitalisation due to further premium growth or increased asset risk, to the extent that capital is no longer commensurate with the current rating.

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