Johannesburg, 30 April 2015 — 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:
The scheme’s rating is underpinned by its market leadership position in the domestic open medical schemes industry, with a substantial 53.9% market share registered (based on principal membership as at 3Q F14). Support in this regard is derived from a strong brand, comprehensive option portfolio and efficient utilisation by members of the voluntary Vitality wellness programme, which in conjunction ensure high member retention and consistent above industry average principal membership growth within targeted market pockets. Attesting to this, the member pool displays a favourable risk profile, with the average member age remaining below the open medical scheme industry benchmark. In addition, with regards to business origination, intermediary or client concentrations are contained at a very low level.
Underpinned by strong reserve accumulation (with R4.8bn in cumulative retained surpluses added to member funds over the review period), statutory solvency improved consistently over the past three years to exceed the minimum regulatory requirement one year ahead of the deadline committed to in the Council of Medical Schemes (“CMS”) business plan. This is viewed favourably by GCR, particularly in light of the increased level of operational flexibility associated therewith. GCR considers consistency in this regard as integral to the scheme’s financial profile and medium term rating strength. Furthermore, note is taken of the scheme’s robust operating performance displayed of late, with consecutive large net healthcare surpluses registered over the past three years. This is supported by a consistent below industry average claims ratio (amidst an ongoing emphasis on claims management and benefit optimisation), as well as an improving degree of cost absorption. Operational execution is further assessed against a high degree of contribution predictability and budget attainment.
A balanced allocation of invested assets continues to support liquidity at a sound level amidst manageable investment exposure relative to accumulated funds. Over the short to medium term, no material change in the scheme’s investment strategy is envisaged.
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 2014)
Claims paying ability: AA+(ZA)
Senior Analyst: Insurance
Sector Head: Insurance Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated April 2014
Discovery Health Medical Scheme 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.
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 ratings are 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(s) included audited annual financial statements for 2014 (plus four years of comparative numbers), detailed full year financial projections for 2015, most recent year to date management accounts to 28 February 2015, as well as other non-public, rating-relevant information.
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Assets||The items on the balance sheet of the medical scheme which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’|
|Balance Sheet||An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.|
|Benefits||Financial reimbursement and other services provided covered by medical schemes under the terms of an insurance contract. An example would be the benefits listed under a Life or Health Insurance policy or benefits as prescribed by a Workers Compensation law.|
|Bond||A certificate issued by a government or corporation as evidence of a debt. The issuer of the bond promises to pay the bondholder a specified amount of interest for a specified period and to repay the loan on the expiration (maturity) date.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|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 insurance.|
|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 insurance 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. For example, common stock market value would be the price of the stock as of a specified date. See also Actual Cash Value.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.|
|Portfolio||All of the medical scheme’s in-force policies and outstanding losses, with respect to described segments of its business. Also, the total securities owned by a medical scheme.|
|Provision||A part (clause, sentence, paragraph, etc.) of an insurance contract that describes or explains a feature, benefit, condition, requirement, etc. of the insurance protection afforded by the contract.|
|Reserve||(1) An amount representing actual or potential liabilities kept by a medical scheme 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.|
|Risk||(1) Uncertainty as to the outcome of an event when two or more possibilities exist. See also Pure Risk and Speculative Risk. (2) A person or thing insured. Contrast with Hazard and Peril.|
|Securities||Evidences of a debt or of ownership, as stocks, bonds, and checks.|
|Solvency||With regard to medical schemes, 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.|
|Surplus||The excess of assets over liabilities. Statutory surplus is a medical scheme’s capital as determined under statutory accounting rules. Surplus determines a medical scheme’s capacity to write business responsibility for only that portion of any risk, which exceeds the company’s established retentions.|
|Term||The period of time for which a policy or bond is issued.|
|Valuation||Estimation of the value of an item, usually by appraisal.|