OREANDA-NEWS. Fitch Ratings has affirmed South Africa-based Home Loan Guarantee Company NPC'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. The rating also factors in 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) declined to ZAR5.3m in the six months ended 31 December 2014 (1H15) from ZAR12.1m in 1H14 (financial year to June 2014 (FYE14): ZAR17.1m, FYE13: ZAR24.8m), following the cancellation of an agreement with ABSA Bank (A-/Negative) in February 2014. This leaves HLGC's premium income reliant on the contract with First National Bank (FNB, the retail banking arm of FirstRand Bank Limited, one of South Africa's four largest banking groups; BBB/Negative). Nevertheless, Fitch views positively that HLGC was able to report a surplus of ZAR5.7m for 1H15 (1H14: ZAR14.4m, FYE14: ZAR23.2m), despite the lower premium levels and weaker investment income of ZAR4.7m (1H14: ZAR14.5m).

HLGC's expense base continues to be fairly high as HLGC's premium rates are set only to cover expected claims payments, i.e. they do not build in costs and overheads, which HLGC aims to cover from investment income. Additionally, the costs of fundraising to support the activities of H4H, HLGC's HIV risk management arm, lead to high fixed costs.

Fitch continues to view HLGC's capitalisation as "extremely strong" based on its Prism factor-based capital model and expects capitalisation to remain commensurate with the rating level. Also, net-assets-to-net premiums increased to 20x at end-1H15 from 6x at FYE14 (FYE13: 3x), after having declined on substantial growth in GWP in previous years.

Fitch views HLGC's equity exposure of 57% of total invested assets 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 given HLGC's small size, and its fairly high investment risk.

A downgrade could be triggered by a significant weakening of HLGC's capitalisation due to premium growth or increased asset risk, as measured for example by net-assets-to-net-premiums decreasing to below 2x. Also, HLGC could be downgraded should it report losses for a sustained period of time.