Johannesburg, 9 April 2019 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Discovery Health Medical Scheme of AAA(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’s 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 spike 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.
Very strong liquidity is supported by the sizeable cash portfolio (FY18: R14.1bn), which covered average monthly claims by 2.3 months (FY17: 2.9 months). Additionally, strong cash flow management (attributed to very large monthly contributions), coupled with a highly tradable investment portfolio, offer considerable liquidity support. Liquidity is likely to be maintained at very strong levels given the scale and tradability of the investment base.
The national scale claims paying ability rating is at its ceiling. Downward rating pressure may arise should the statutory solvency margin fall below the required minimum, and/or from a severe weakening in key operating and liquidity metrics.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2000)|
|Claims paying ability: AA-(ZA)|
|Last rating (April 2018)|
|Claims paying ability: AAA(ZA)|
|Senior Credit Analyst|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated May 2018
Discovery Health Medical Scheme rating reports, 2000-2018
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 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; 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.
The information received from Discovery Health Medical Scheme and other reliable third parties to accord the credit rating included:
- The unaudited financial statements to 31 December 2018
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2019
- Other relevant documents
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|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.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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.|
|Pool||An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.|
|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.|
|Retention Rate||The net amount of risk the ceding company keeps for its own account as a percentage of GWP.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|Upgrade||The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade|
For a detailed glossary of terms please click here