Johannesburg, 18 April 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Discovery Health Medical Scheme of AA+(ZA), with the rating outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Discovery Health Medical Scheme (“DHMS”) based on the following key criteria:
DHMS derives significant rating strength from its well established market presence, accounting for 54.4% of principal membership in the open market medical scheme industry as at 3Q F15. This is underpinned by the scheme’s strong brand recognition, coupled with members’ voluntary participation on the Vitality wellness programme, serving to support membership retention, while contributing towards improving members’ risk profiles.
The member pool displays a favourable risk profile, with the average principal member age, as well as the average beneficiary age, remaining stable at 44 years and 34 years respectively. Additionally, in terms of business origination, intermediary and client concentrations are contained at a very low level.
Solvency is viewed to be strong, supported by solid reserve accumulation. In this regard, solvency metrics have steadily strengthened, particularly over the past three years, with the scheme maintaining the statutory solvency margin at 26% at FYE15. Going forward, management’s commitment towards maintaining solvency strength is viewed favourably.
DHMS has reported strong operating performances over the past three years, resulting in a cumulative net surplus of R4.1bn. This is supported by a consistent below industry average claims ratio (amidst ongoing emphasis on claims management and benefit optimisation), as well as an improving degree of cost efficiency. Operating results are expected to remain sound over the medium term, supportive of ongoing reserve management objectives.
Liquidity continues to be supported by a conservative investment strategy, with cash and equivalents accounting for 64% of the total investment portfolio at FYE15. The improved solvency margin has facilitated optimisation of the investment portfolio, with no material deviation in the current asset allocation envisaged over the medium term.
In consideration of prevailing characteristics in the South African medical schemes arena, the industry rating ceiling remains capped at AA+(ZA). In the absence of a revision thereof, an upward adjustment of the scheme’s rating (which constitutes the highest rating an open or closed medical scheme currently can be accorded by GCR) is considered unlikely over the short to medium term. Conversely, downward rating pressure may arise from a severe weakening in key operating and solvency metrics and/or a marked loss in membership within the 24-month rating horizon.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2000)|
|Claims paying ability: AA-(ZA)|
|Last rating (April 2015)|
|Claims paying ability: AA+(ZA)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated April 2015
Discovery Health Medical Scheme rating reports, 2000-2015
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.
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.
Discovery Health Medical Scheme 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 Discovery Health Medical Scheme with no contestation of the rating.
The information received from Discovery Health Medical Scheme and other reliable third parties to accord the credit rating included:
- Unaudited financial results to 31 December 2015
- Four years of comparative numbers
- Unaudited interim results to 29 February 2016
- Budgeted financial statements for 2016
- 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 rating.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Credit rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Investment portfolio||A collection of investments held by an individual investor or financial institution.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. 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.|
|Loss||The happening of the event for which insurance pays.|
|Operating result||The sum of underwriting result and investment income.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Rating horizon||The rating outlook period|
|Reserve||(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|Statutory||Required by or having to do with law or statute.|
|Statutory solvency margin||Gives an indication as to whether the minimum regulatory solvency margin is being met, based on the net statutory assets to statutory net premiums ratio.|
GCR affirms Discovery Health Medical Scheme’s rating of AA+(ZA); Outlook Stable