Rating Action
Johannesburg, 01 September 2020 – GCR Ratings (“GCR”) has affirmed Fedhealth Medical Scheme’s (“Fedhealth”) national scale financial strength rating of AA-(ZA), with a Stable Outlook:
| Rated Entity | Rating class | Rating scale | Rating | Outlook / Watch |
| Fedhealth Medical Scheme | Financial strength | National | AA-(ZA) | Stable Outlook |
The rating action follows a reduction in the South African country and medical schemes sector risk assessments.
The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on 27th May 2020. Click here to access the link. On 14th July 2020, the South African medical schemes sector risk score was also lowered to 7.75 from 8.00 previously. Click here to access link.
Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.
Rating rationale
GCR reduced South Africa’s Country Risk Score to reflect expectations of the adverse impact of COVID-19 related disruptions on economic productivity, as well as our view of the effectiveness of interventions to stabilise the economy. Meanwhile, the medical scheme sector risk score was moderated to capture expected reduction in industry gross contribution levels, amidst exacerbated economic challenges which are likely to limit industry earnings and solvency resilience over the medium term despite lower utilisation of non-essential benefits and strong regulatory environment.
While the subsequent lowering of the operating environment scores has not translated to a rating downgrade, the scheme’s national scale financial strength rating captures more depressed and volatile earnings following amalgamation with Topmed. As such, GCR will continue to monitor ratings, with a full rating review on Fedhealth expected to be carried out by October 2020.
Outlook statement
The Stable Outlook reflects our expectations that, the scheme’s membership profile is not likely to improve, while capitalisation and liquidity will be maintained at strong levels over the medium term. Accumulated reserves are viewed to be sufficient to tolerate reductions in contributions and investment income among other potential earnings strains stemming from COVID-19 pandemic risks.
Rating triggers
Upward rating movement is unlikely over the medium term, but, exceptional earnings resilience could be positively viewed. Meanwhile, downward rating action could follow material and/or sustained deterioration in earnings, resulting in solvency and/or liquidity moderations beyond expectations.
Analytical contacts
| Primary analyst | Fleur Ngassa | Analyst: Insurance Ratings |
| Johannesburg, ZA | MarlaineN@GCRratings.com | +27 11 784 1771 |
| Committee chair | Matthew Pirnie | Group Head of Ratings |
| Johannesburg, ZA | MatthewP@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, May 2020 |
| GCR South African Medical Schemes Sector Risk Score, July 2020 |
Ratings history
| Rated entity | Rating class | Review | Rating scale | Rating | Outlook/Watch | Date |
| Fedhealth Medical Scheme | Claims paying ability | Initial | National | BB(ZA) | Stable | Oct 2001 |
| Financial strength | Last | National | AA-(ZA) | Stable | Oct 2019 |
Risk score summary
| Rating components & factors | Fedhealth Medical Scheme |
| Operating environment | 14.75 |
| Country risk score | 7.00 |
| Sector risk score | 7.75 |
| Business profile | (1.25) |
| Membership profile | (1.25) |
| Management and governance | 0.00 |
| Financial profile | 2.25 |
| Earnings | 0.00 |
| Capitalisation | 1.50 |
| Liquidity | 0.75 |
| Comparative profile | 0.00 |
| Peer analysis | 0.00 |
| Total Score | 15.75 |
Glossary
| Rating Outlook | See GCR Rating Scales, Symbols and Definitions. |
| Release | An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations. |
| 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. |
| Reserves | A portion of funds allocated for an eventuality. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Short Term | Current; ordinarily less than one year. |
| 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. |
Salient Points 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 is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated party. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual 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 the entity and other reliable third parties to accord the credit rating included:
- Latest audited financial statements;
- Four years of comparative audited financial statements to 31 December;
- Other relevant documents
