Announcements

GCR affirms Compcare Wellness Medical Scheme’s rating of A(ZA); Outlook Stable

Johannesburg, 1 July 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Compcare Wellness Medical Scheme of A(ZA); with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to Compcare Wellness Medical Scheme (“Compcare”) based on the following key criteria:

Compcare has embarked on an aggressive membership growth strategy over the past two years, with the principal membership base climbing by 29% to 16,309 in FY14. A successive large membership growth rate (28%) is projected for FY15, with the membership base expected to rise to 20,895 principal members. The increasing diversification of the membership base, coupled with the improving risk profile thereof (with average age statistics comparing favourably to open industry metrics), are viewed to hold medium term financial benefits for the scheme.

Compcare’s membership growth has, however, suppressed the scheme’s earnings patterns relative to previous years. In this regard, the scheme has recorded consecutive net deficits over the past two years, with a breakeven net result budgeted for FY15. Medium term earnings potential is dependent upon the feed-through of the improving profile of the risk pool to the healthcare account, coupled with the maintenance of adequate pricing increases. Accordingly, the attainment of improved net healthcare results over the rating horizon represents a key consideration.

Compcare is viewed to evidence an adequate, albeit contracting, level of solvency. Reductions stem from the combination of exposure to rapid rises in membership levels, and the consecutive net deficits eroding members’ surplus. This saw the statutory solvency margin lower to 37% in FY14 (FY13: 42%). The high membership growth expectation for FY15 is expected to see the solvency margin contract further, to 28%. Going forward, management will target a statutory solvency margin range of 27% to 30%.

Compcare’s liquidity represents a rating strength, taking cognisance of anticipated reductions in prospective liquidity metrics relative to historical highs. In this regard, rising claims volumes and limited operational cash flow generation, coupled with the shift in asset allocations, is expected to see short term liquidity at strong, albeit reduced levels, relative to the very high measures observed over the review period.

Increased exposure to listed equity is in line with management’s long term investment objectives of enhancing investment returns. Management expects to limit holdings of listed equities to a maximum level of 20% of reserves, which GCR views as a manageable level of market exposure relative to the reserve base.

A strengthening in the rating over the medium term is dependent upon a material and sustained improvement in earnings capacity, coupled with the membership base exhibiting an improved average risk profile and level of diversified scale. Substantially enhanced solvency metrics may also serve to uplift the rating. Downward pressure on the rating may result from statutory solvency lowering to a level below management’s targeted range, as well as the registering of further net deficits over the medium term, impacting negatively on key credit protection metrics. Furthermore, the ontake of higher market risk, or reductions in liquidity, sustained over the medium term, could also have a negative impact on the rating.

NATIONAL SCALE RATINGS HISTORY
 
Initial rating (October 2000)
Claims paying ability: A-(ZA)
Outlook: Stable
 
Last rating (June 2014)
Claims paying ability: A(ZA)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst   Secondary Analyst
Marc Chadwick   Vinay Nagar
Sector Head: Insurance Ratings   Junior Analyst
(011) 784-1771   (011) 784-1771
chadwick@globalratings.net   vinay@globalratings.net
Committee Chairperson
Sheri Few
Senior Analyst
(011) 784-1771
few@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating South African Medical Schemes, updated April 2015

Compcare rating reports, 2000-2014

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.

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 utilised, 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.

Compcare 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 Compcare with no contestation of the rating.

The information received from Compcare and other reliable third parties to accord the credit rating included the 2014 audited annual financial statements (plus four years of comparative numbers), full year detailed budgeted financial statements for 2015, unaudited year-to-date management accounts to April 2015, and other related documents.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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