Johannesburg, 25 September 2019 – GCR has affirmed Discovery Health Medical Scheme’s (“DHMS”) national scale financial strength (formerly claims paying ability) 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|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for DHMS was placed ‘Under Criteria Observation’. GCR finalised the review for DHMS under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for DHMS has been revised in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
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’ exceptionally 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 FY18. 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 the average age of beneficiaries trending below 35 years. Persistency within the membership base and proven risk management protocols partly mitigate the risk of an ageing member profile (as evidenced by the rise in the pensioner ratio to 9.8% in FY18 from 9.3% in FY17) through strong benefit and price alignment that supports operational targets.
DHMS reflects 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 absorbance of operational volatility. To this end, the claims ratio has been well contained across the review period, with the increase in FY18 (88.4% vs FY17: 85.7%) attributed to the unanticipated increase in Value Added Tax (“VAT”) and higher utilisation of hospital benefits. This gave rise to a net healthcare deficit of R353m in FY18 (FY17: surplus of R968m), although the loss was fully absorbed by sound investment income with the scheme reporting a net surplus of R885m in FY18 (FY17: R2bn). Over the short term, the net healthcare result may remain constrained due to option specific challenges (not priced into the 2019 contribution rate increase), but is likely to revert to positive levels in FY20.
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. This was the case over the past two years where contrasting net healthcare results had minimal impact on the statutory solvency margin (FY18: 27.3%; FY17: 27.4%). The reserve management strategy is likely to see solvency metrics maintained at strong levels going forward, preserving an adequate buffer above the regulatory minimum. At YTD July 2019, the statutory solvency margin equated to 26.8%, which tracks in line with GCR’s rating horizon expectation range of 26% to 27%.
Very strong liquidity is supported by strong cash flow management (attributed to very large monthly contributions), coupled with a highly tradable investment portfolio (FY18: R26.4bn). This translated into a stressed gross cash and operational coverage ratio of 4.9 months and 1x at FY18. Liquidity is likely to be maintained at very strong levels given the scale and tradability of the investment base.
The Stable Outlook reflects expectations that the scheme will sustain an exceptional membership profile, supported by its market leading position. Furthermore, in GCR’s view, solvency and liquidity strength will persist, and earnings is likely to revert to historically strong levels over the medium term.
The national scale financial strength rating is at its ceiling. While a reduction in the rating over the short to medium term is viewed to be unlikely, ratings pressure may arise from sustained earnings weakness, resulting in an erosion of balance sheet quality and statutory solvency.
|Primary analyst||Vinay Nagar||Senior Credit Analyst: Insurance Ratings|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
|Committee chair||Yvonne Mujuru||Sector Head: Insurance Ratings|
|Johannesburg, ZA||YMujuru@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, June 2019|
|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|
RISK SCORE SUMMARY
|Country risk score||7.50|
|Sector risk score||8.00|
|Management and governance||0.00|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Beneficiary||Nominated person or institution in the policy document that is entitled to receive the proceeds stated in the policy.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the contract.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|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 ratings were 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 face-to-face 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 Dec 2018
- Four years of comparative audited numbers
- Unaudited interim results up to 31 July 2019
- Budgeted financial statements for 2019
- Other related documents.