Credit Rating Announcement
Johannesburg, 06 April 2020 – GCR has affirmed Discovery Health Medical Scheme’s (“DHMS”) national scale financial strength rating of AAA(ZA), Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Discovery Health Medical Scheme||Financial strength||National||AAA(ZA)||Stable Outlook|
DHMS’ rating is supported by the scheme’s very strong membership profile (market leading position in the open schemes industry), coupled with a strong financial profile.
DHMS’ very large membership base and diverse risk pool is viewed to be a material rating strength. DHMS is the largest open medical scheme, representing 57% of total open scheme principal members in FY19. This is underpinned by consistently high member retention, sound new member uptake and limited intermediary and client concentration. The member pool displays a favourable risk profile, with an average beneficiary age of 35 years and pensioner ratio of 10.4% in FY19. Going forward, prolonged economic slowdown exacerbated by interventions to curb the spread of COVID-19 will likely pressure disposable income, thereby limiting the already muted membership growth prospect. This notwithstanding, GCR views DHMS’s large scale and favourable membership diversification to place the scheme in a better position to sustain a sound membership profile.
DHMS has reflected strong operational effectiveness resulting in a high degree of earnings control over the review period. GCR views the scheme’s very strong operational framework and contribution scale as key contributors to the attainment of sound aggregated net healthcare results, and absorption of operational volatility. Strong earnings management has seen the scheme comfortably sustain the statutory solvency margin above 25% throughout the review period. The scheme’s strategy does not entail excessive reserve build, and in periods where financial performance exceeds targets, greater operational flexibility is available in ensuing years to allow for sustained stability in solvency levels.
As the COVID-19 pandemic continues to develop, potential higher claims coupled with lower investment returns may lead to lower than anticipated earnings. Cognisance is however taken that under stress scenarios, the scheme’s existing reserve buffer, although it may narrow, is expected to absorb near-term earnings strain. Nonetheless, the duration and severity of the pandemic is still highly uncertain, and if actual claims experience is higher than anticipated, persistent earnings pressure resulting in an erosion of the reserve buffer below expectation may lead to a weakened financial profile.
Liquidity is viewed to be strong, supported by sound cash flow management (attributed to very large monthly contributions), coupled with a highly tradable investment portfolio (FY19: R25.3bn). This translated into stressed investment coverage of gross claims and operational cash coverage of 4.1 months and 1x at FY19. Going forward, liquidity is expected to be maintained at adequate levels supported by a large and tradable investment portfolio, although it could be impacted by weaker than expected operational cash flow generation as a result of COVID-19.
The Stable Outlook reflects expectations that the scheme will sustain a very strong membership profile, supported by its market leading position. Furthermore, in GCR’s view, the scheme’s existing reserve buffer will mitigate near-term earnings risk and liquidity will be maintained at rating sufficient levels.
The national scale financial strength rating is at its ceiling. Downward rating action could follow if the COVID-19 outbreak leads to weaker performance relative to expectations and there is a severe deterioration in the financial profile.
|Primary analyst||Sylvia Mhlanga||Senior Analyst|
|Johannesburg, ZA||SylviaM@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Siyuan Lu||Analyst|
|Johannesburg, ZA||SiyuanL@GCRratings.com||+27 11 784 1771|
|Committee chair||Susan Hawthorne||Senior Analyst|
|Johannesburg, ZA||SusanH@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, January 2020|
|GCR South African Medical Schemes Sector Risk Score, September 2019|
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||AA-(ZA)||Stable||April 2000|
|Financial strength||Last||National||AAA(ZA)||Stable||September 2019|
Risk Score Summary
|Country risk score||7.50|
|Sector risk score||8.00|
|Management and governance||0.00|
|Beneficiary||Nominated person or institution in the policy document that is entitled to receive the proceeds stated in the policy.|
|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.|
|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.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|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 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.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process 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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Discovery Health Medical Scheme. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Discovery Health Medical Scheme participated in the rating process via management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Discovery Health Medical Scheme and other reliable third parties to accord the credit ratings included:
- The unaudited financial results to 31 December 2019
- Four years of comparative audited numbers
- Unaudited interim results up to 31 January 2020
- Budgeted financial statements to 31 December 2020
- Other related documents.