Johannesburg, 31 May 2018 — 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 Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Fedhealth Medical Scheme (“Fedhealth”) based on the following key criteria:
Fedhealth’s earnings capacity is viewed to be adequate, albeit noting potential for margin volatility to persist going forward. The scheme’s net healthcare margin rebounded to 0.9% in FY17 (FY16: -5.6%; three year average: -2.4%). This was derived from a higher average annual contribution rate increase (13.4%, versus 10.8% in FY16) contributing in part to a notably reduced claims ratio. Nonetheless, as the scheme seeks to balance growth objectives with operational targets, contribution rate increases are expected to be more competitive going forward, which may see a reversion of the claims ratio to historical levels. Accordingly, the extent to which the scheme can achieve financial targets and preserve solvency strength represent a rating consideration going forward.
Solvency stabilised at a strong level, with the statutory solvency margin registering at a higher than expected 32% at FY17 (BGT17: 30%). This measures at the upper end of management’s internal target range which allows for a degree of loss absorption capacity without lowering the scheme’s overall credit strength. Solvency is expected to be maintained at a strong level in FY18, with the statutory solvency margin budgeted at a higher 33%.
Fedhealth’s liquidity is considered to be adequate, with the net cash coverage ratio averaging 2 months over the past three years. Liquidity has been historically hampered by the above average claims experience, coupled with minimal operating cash generative capacity. While the net cash coverage ratio registered an improvement at FY17 (3 months vs. FY16: 1.5 months), this was partly due to atypical working capital inflows, which resulted in an inflated year end cash balance. Going forward, the rebalancing of the investment portfolio in line with historical weights is likely to see liquidity revert to adequate levels.
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 and remains a source of claims pressure. In this respect, Fedhealth’s average member beneficiary age of 39 years registered above that of the open scheme industry average (35 years). This was further exacerbated by a high proportion of pensioners, with the pensioner ratio equating to a slightly higher 14.9% in FY17 (FY16: 14.6%). Note is taken of the stabilising age profile over the past three 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.
Positive rating movement could develop if the scheme’s earnings capacity sustainably improves whilst maintaining strong levels of solvency. Conversely, downward rating pressure may emanate from a sustained deterioration in earnings which may cause a material weakening in solvency. Furthermore, a sustained loss of members and/or a significant deterioration in liquidity could also exert downward rating pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2001)|
|Claims paying ability: BB(ZA)|
|Last rating (May 2017)|
|Claims paying ability: AA-(ZA)|
|Senior Credit Analyst|
|Junior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated May 2018
Fedhealth Medical Scheme rating reports, 2001-2017
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 2017
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2018
- Year to date management accounts to February 2018
- 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
|Agency||An insurance sales office which is directed by an agent, manager, independent agent, or company manager.|
|Audited Financial Statements||Financial statements that bear the report of independent auditors (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|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.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|Interest||Money paid for the use of money.|
|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.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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|
|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.|
|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.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms Fedhealth Medical Scheme’s rating of AA-(ZA); Outlook Stable.