Johannesburg, 31 July 2015–Global Credit Ratings has today assigned a national scale claims paying ability rating to Sizwe Medical Fund of A+(ZA); with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Sizwe Medical Fund (“Sizwe”) based on the following key criteria:
Sizwe has exhibited a materially elevated level of earnings capacity over the past two years, representing a material rating strength. In this regard, the scheme registered an average net healthcare margin of 6.8% between FY13 and FY14, and has budgeted for a further strong margin of 4.5% in FY15. Coupled with consistent investment yields, this has resulted in R459m in cumulative net surpluses being generated over the corresponding period, with a R175m net surplus budgeted for FY15. The distinct turnaround in healthcare performance has been achieved through the deployment of targeted corrective pricing, reducing the claims ratio to a low 79.9% in FY14, with repriced contribution levels serving as a foundation for future earnings.
Sizwe’s solvency is viewed to be very strong, and a key rating strength. Robust reserve accumulation over the past 2 years has seen the members’ surplus increase by a compound annual growth rate of 32%, amounting to R991m at FYE14 (versus R566m at FYE12). Accordingly, in conjunction with reducing membership volumes, this resulted in the statutory solvency margin rising to a very strong 46% in FY14. Continued reserve accumulation is expected to see solvency strength persist over the rating horizon (FY15 forecast: 49%), with management aiming to maintain the solvency margin above 40% over the medium term.
Sizwe’s liquidity has consistently improved over the review period, with net cash coverage strengthening to a moderately strong 2.7 months in FY14. The upward liquidity trend has been underpinned by healthy operational cash flow generation, which is expected to be sustained at moderate levels over the rating outlook period. The balance of Sizwe’s investment portfolio currently exhibits a fairly contained level of risk, with the value of listed equities and bonds corresponding to 32% of the total investment portfolio at FYE14 (and 35% of the members’ surplus). Going forward, management is likely to adopt a revised asset allocation strategy, which may cause the weighting of listed equities and bonds to rise.
Sizwe’s membership base scale is viewed to be intermediate, with short term growth initiatives taken into consideration. In this regard, while total beneficiaries remain fairly high (FY14: 120,005), consistent membership losses over the review period cumulatively amount to 43,223 (a net loss of 26% relative to FY10). The scheme expects this trend to reverse from FY15 onward, with increased penetration into existing employer groups expected to be supported by marketing and brand management strategies.
The lifting of Sizwe’s curatorship and the accompanying set of corrective measures that have been implemented to address highlighted items, is positively considered, given the strengthening of the governance structure and strengthened operational controls and processes of the fund going forward.
The rating could benefit positively over the medium term from the attainment of material increases in membership scale, facilitating an improved diversification level and member age profile. This must be coupled with the generation of consistent net surpluses, accompanied by the maintenance of credit protection measures at sound levels. A significant deterioration in financial performance, including a considerable weakening of key liquidity metrics and solvency measures, as well as considerable membership losses below comfortable levels, may give rise to negative rating pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating/Last rating (July 2015)|
|Claims paying ability: A+(ZA)|
|Primary Analyst||Secondary Analyst|
|Marc Chadwick||Catherine Zimba|
|Sector Head: Insurance Ratings||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating South African Medical Schemes, updated April 2015.
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Accumulated funds||An amount representing the accumulation of historical and current net surpluses and deficits, held for the benefit of members and their dependants|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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.|
|Benefits||Financial reimbursement and other services provided covered by medical schemes under the terms of a medical scheme plan.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|Claim||A request for payment of a loss, which may come under the terms of a medical scheme plan.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by a medical scheme to agents and brokers.|
|Coverage||The scope of the protection provided under a contract of a medical scheme plan.|
|Interest||Money paid for the use of money.|
|Liquidity||The ability of a medical scheme to convert its assets into cash to pay claims if necessary.|
|Loss||The happening of the event for which a medical scheme pays.|
|Market Value||The price for which something would sell, especially the value of certain types of assets, such as stocks and bonds. It is based on what they would sell for under current market conditions.|
|Members’ surplus||Accumulated funds plus revaluation reserves.|
|Portfolio||The total securities owned by a medical scheme.|
|Provision||A technical reserve of a medical scheme established to provide for the future liability for claims which have occurred but which have not yet been settled.|
|Risk||(1) Uncertainty as to the outcome of an event when two or more possibilities exist. (2) A person or thing covered by a medical scheme.|
|Securities||Evidences of a debt or of ownership, as stocks, bonds, and checks.|
|Solvency||Reserves (accumulated funds or members’ surplus) expressed as a percentage of contributions (gross or net).|
|Statutory||Required by or having to do with law or statute.|
|Term||The period of time for which a policy or bond is issued.|
|Valuation||Estimation of the value of an item, usually by appraisal.|
For a more detailed glossary of terms, please click here
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.
Sizwe Medical Fund 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 Sizwe Medical Fund with no contestation of the rating.
The information received from Sizwe Medical Fund and other reliable third parties to accord the credit rating included:
- The 2014 audited annual financial statements
- Four years of comparative audited numbers
- Unaudited interim results to 30 April 2015
- Budgeted financial statements for 2015
- Other related 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.