Johannesburg, 30 May 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Fedhealth Medical Scheme of AA-(ZA), with the rating outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Fedhealth Medical Scheme (”Fedhealth”) based on the following key criteria:
GCR has affirmed the rating at AA-(ZA) with the outlook placed on Negative, reflecting GCR’s expectation for potential continued earnings pressure over the rating horizon, and consequent continued moderation in solvency strength.
Fedhealth’s earnings are viewed to be pressured, with atypically high claims in 1H FY16 (experienced across the industry) in particular limiting the scheme’s earnings headroom. With respect to the latter, Fedhealth has sought to utilise excess reserves over the past four years (FY13 to FY16) as a means of providing affordability relief to members. The concomitant thin net results were projected to lower solvency to a level viewed by management to sustain a sufficiently high risk buffer. However, in FY16, an elevated claims experience drove the claims ratio to a review period high of 93.5% (prior three year average: 91%), contributing to an overall net deficit of R57m (budget: R2.2m net surplus). In turn, this resulted in solvency contracting to 31.5%, below management’s target of 33.6%. In response, management effected a higher average annual contribution rate increase (FY17: 13.4%; FY16: 10.8%), and implemented corrective measures targeting claims containment. These are aimed at alleviating claims ratio pressure in FY17, and consequently maintaining solvency within management’s target range. However, GCR takes note of the potential for continued soft to negative net earnings to result in a sustained moderation in solvency strength, negatively impacting on the scheme’s credit profile.
Fedhealth’s solvency strength moderated in FY16, on the back of the weakening in earnings. In this regard, accumulated funds reduced by 5% to end the year at R982m, with the statutory solvency margin lowering to 32% (FY15: 36%), below the projected 34%. Management are targeting a minimum statutory solvency range of 28% to 32%, with the improvement in earnings capacity budgeted to preserve solvency at the lower end of this band. However, GCR views a lowering in solvency to reflect a likely reduction in the scheme’s overall credit strength.
Liquidity is viewed to be adequate, with the highly tradable nature of invested assets partly offsetting reduced cash coverage metrics. In terms of the latter, negative earnings, coupled with cash flow strain in FY16 saw a 17% reduction of year end cash balances, with the net cash coverage ratio lowering to 1.5 months (FY15: 2 months). A stable investment strategy is expected to uphold adequate levels of liquidity over the medium term, subject to stabilisation in the earnings profile.
Fedhealth exhibits a fairly consistent membership base, holding a stable market share of just over 3% across the review period (based on principal membership). The member pool is viewed to be well diversified, with individuals representing the majority of members, and concentration exposure within the corporate segment viewed to be limited.
The member risk pool exhibits an aged profile, impacting negatively on the scheme’s earnings. In this respect, Fedhealth’s average member beneficiary age of 39 years registered above that of the open scheme industry average (34 years). This was further exacerbated by a high proportion of pensioners, with the pensioner ratio equating to 14.6% (3Q F16 industry average: 8.2%). Note is taken of the stabilising age profile over the past two years, which does indicate a degree of membership pool renewal. Nonetheless, the scheme’s age profile is not expected to improve materially over the rating horizon.
The negative outlook reflect the potential for continued soft to negative net results to result in a sustained moderation in solvency strength, negatively impacting on the scheme’s credit profile. Should management’s initiatives succeed in significantly lowering the claims ratio, with an outperformance of the budgeted net result leading to a statutory solvency margin in excess of budget (registering within the upper end of the target range), then the rating may revert to a “Stable” outlook.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2001)|
|Claims paying ability: BB(ZA)|
|Last rating (May 2016)|
|Claims paying ability: AA-(ZA)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated July 2016
Fedhealth rating reports, 2001-2016
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.
Fedhealth 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 Fedhealth with no contestation of the rating.
The information received from Fedhealth and other reliable third parties to accord the credit rating included:
- The audited financial statements to 31 December 2016
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2017
- Year to date management accounts to March 2017
- Other relevant documents
The rating above was 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
|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.|
|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.|
|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.|
|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.|
|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).|
|Renewal||The re-establishment of the in-force status of a policy, the term of which has expired or will expire unless it is renewed.|
|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||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.|
For a detailed glossary of terms please click here
GCR affirms Fedhealth Medical Scheme’s rating of AA-(ZA); Outlook Negative.